Fortnightly - Information technologyhttp://www.fortnightly.com/tags/information-technology
en'Resilience'http://www.fortnightly.com/fortnightly/2013/03/resilience
<div class="field field-name-field-import-deck field-type-text-long field-label-inline clearfix"><div class="field-label">Deck:&nbsp;</div><div class="field-items"><div class="field-item even"><p>A new watchword for the industry and its regulators.</p>
</div></div></div><div class="field field-name-field-import-byline field-type-text-long field-label-inline clearfix"><div class="field-label">Byline:&nbsp;</div><div class="field-items"><div class="field-item even"><p>Michael T. Burr, Editor-in-Chief</p>
</div></div></div><div class="field field-name-field-import-bio field-type-text-long field-label-inline clearfix"><div class="field-label">Author Bio:&nbsp;</div><div class="field-items"><div class="field-item even"><p><strong>Michael T. Burr</strong> is <em>Fortnightly’s</em> editor-in-chief. Email him at <span class="s1"><a href="mailto:burr@pur.com">burr@pur.com</a></span></p>
</div></div></div><div class="field field-name-field-import-volume field-type-node-reference field-label-inline clearfix"><div class="field-label">Magazine Volume:&nbsp;</div><div class="field-items"><div class="field-item even">Fortnightly Magazine - March 2013</div></div></div><div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"><p>If you’ve read my column regularly for a few years, then you probably know one of my favorite industry events is the DistribuTECH annual conference and tradeshow. DTECH gives me a clear sense of what the industry’s technology leaders are hearing from their customers, and how they expect to focus their work.</p>
<p>Each year, certain themes tend to emerge from DTECH. They show up in the conference proceedings and in exhibitors’ booths—and most importantly, during conversations with attendees. Last year’s themes seemed to be “analytics” and “advanced distribution management systems.” In 2010 and 2011, the themes involved demand response and customer engagement. And before that, every DTECH exhibitor was providing “smart grid solutions”—whatever that meant to them.</p>
<p>At 2013’s DTECH, the theme seemed to be “resilience”—specifically, the system’s ability to withstand a variety of assaults, physical and cyber. The implications of this theme raise some interesting questions about the industry’s future—in terms of both investment plans and operational strategies.</p>
<p><b>Sandy’s Timing</b></p>
<p>Virtually every conversation at DistribuTECH included some discussion about the effects of last October’s Superstorm Sandy. Not since Hurricane Katrina has a weather event created such widespread destruction of infrastructure systems—or such nationwide concern. That’s because Sandy struck the Northeast at a fateful moment in history.<b><sup><a href="http://www.fortnightly.com/fortnightly/2013/03/%E2%80%98resilience%E2%80%99/page/0/2" title="1. See “Perfect Superstorm,” December 2012, and “Islands in the Storm,” Public Utilities Fortnightly, January 2013.">1</a></sup></b></p>
<p>The storm arrived after a series of storms in recent years caused extended outages in the region. Sandy also hit just after a wave of cyber attacks had exposed the fragility of many critical networks, and just as the Federal Energy Regulatory Commission (FERC) was intensifying its scrutiny<b><sup><a href="http://www.fortnightly.com/fortnightly/2013/03/%E2%80%98resilience%E2%80%99/page/0/2" title="2. See “NERC on a Wire,” Public Utilities Fortnightly, February 2013.">2</a></sup></b> of the North American Electric Reliability Corp. (NERC)—which FERC has tasked with creating and enforcing standards for reliability and security.</p>
<p>Defense Sec. Leon Panetta, in a speech<b><sup><a href="http://www.fortnightly.com/fortnightly/2013/03/%E2%80%98resilience%E2%80%99/page/0/2" title="3. See http://www.defense.gov/transcripts/transcript.aspx?transcriptid=5136">3</a></sup></b> before a group of executives on October 11, described a recent “unprecedented” wave of cyber intrusions, and called for decisive action to secure critical infrastructure. He asked industry leaders to work harder to secure their systems, and implored Congress to pass legislation to promote information sharing for a more united front against cyber attacks. He also said the administration might issue an executive order if Congress failed to act.</p>
<p>Panetta was talking specifically about cybersecurity. But Superstorm Sandy put a gigantic real-world exclamation point on the message: our critical infrastructure must be made resilient. The threats are very real. They’re costing our economy billions of dollars a year, and if we don’t do something about it, they’ll cost us many billions more in the future—even trillions, if you believe in worst-case scenarios; In my recent interview with Amory Lovins <i>(“<a href="http://www.fortnightly.com/fortnightly/2013/03/turning-energy-inside-out">Turning Energy Inside Out</a>,” this issue), </i>he described the findings of a Defense Science Board Task Force suggesting damage to U.S. critical infrastructure could cause “economy-shattering disruption.”</p>
<p>The question, however, is how can we make the utility system resilient?</p>
<h4>Cellular Solution</h4>
<p>Among the range of approaches to resilience that are being proposed, most can be divided into four basic categories: 1) regulatory mandates; 2) infrastructure investments; 3) operating practices; and 4) structural changes. In the aftermath of Superstorm Sandy, and amid a growing cyber war, action is happening on all four fronts.</p>
<p>On the regulatory front, Sec. Panetta’s prediction came true in February 2013, when Pres. Obama ordered the National Institute of Standards and Technology (NIST) to establish security guidelines for critical infrastructure protection. The order aims to clear the way for better information sharing, collaboration, and coordination among private-sector and government entities. The president’s order, combined with Superstorm Sandy, raised the stakes of NERC’s standard-setting and enforcement efforts.</p>
<p>Also in February, some utilities affected by Sandy announced major plans to improve resilience. In New Jersey, PSE&amp;G said it would spend nearly $4 billion over the next decade to strengthen and protect electric and gas systems from “extreme weather patterns that have become commonplace.” In addition to basic efforts like elevating hardware and undergrounding distribution lines, PSE&amp;G’s plans include smart grid systems to improve outage detection and restoration.</p>
<p>In the third category, the industry’s operating practices and standards are being subjected to a new round of debate. A cultural divide still separates the domains of information technology (IT) and operations technology (OT), with the result that state-of-the-art security protocols are systematically omitted from utility operational practices—and sometimes even from new technologies.</p>
<p>Of course, security standards are only as good as the systems and practices that use them. “NERC CIP standards say utilities only have to address cybersecurity for routable protocol,” said control security expert Joe Weiss, speaking to a Stanford University colloquium<b><sup><a href="http://www.fortnightly.com/fortnightly/2013/03/%E2%80%98resilience%E2%80%99/page/0/2" title="4. http://youtu.be/S3Yyv53dZ5A">4</a></sup></b> last October. In effect, such an approach discourages utilities from using IP-networked systems—which are the most interoperable and standardized, and therefore most readily secured. “They’re pulling IP to [avoid getting] audited,” he said.</p>
<p>According to Weiss, the solution for such dilemmas requires a basic change in the industry’s operating credo—and therefore its design specifications. “If you want protected systems, you have to start over in design,” he said. “[Previous] design pillars included reliability and safety, and that’s it. Security goes against those two pillars, and that’s what makes it so difficult. Reliability and security should be [two sides of the same coin], but they aren’t.”</p>
<p>That brings us to the fourth approach to achieving resilience: structural change.</p>
<p>If the concept of resilience—including cyber and physical security—had been baked into the industry’s culture from the beginning, the energy grid might look a lot different from what it does today. It might look less like a hub-and-spoke system—with relatively few central power plants connected to local distribution via long-haul transmission lines—and more like a cellular network.<b><sup><a href="http://www.fortnightly.com/fortnightly/2013/03/%E2%80%98resilience%E2%80%99/page/0/2" title="5. “Turning Energy Inside Out.” See also, Christopher Mims, “In Sandy’s wake, here’s why millions of Americans have cell service but no power,” Quartz, Oct. 30, 2012.">5</a></sup></b> A cellular electric system would feature a larger number of smaller generation sources, located closer to loads, with discrete parts of the grid capable of being isolated from the rest.</p>
<p>In a word, that’s the “microgrid” model—and not coincidentally, most conversations at this year’s DistribuTECH eventually proceeded from the call for resilience to the microgrid solution.</p>
<p>Two articles in this issue <i>(“<a href="http://www.fortnightly.com/fortnightly/2013/03/peaceful-coexistence">Peaceful Coexistence</a>” and “<a href="http://www.fortnightly.com/fortnightly/2013/03/law-unintended-consequences">The Law of Unintended Consequences</a>”)</i> address business and regulatory models affecting microgrid development. But as challenging as those factors might be, convincing the industry’s engineers to embrace the idea of microgrids might depend on a fundamental cultural shift—namely, adopting “resilience” as a new pillar in the operating mandate.</p>
<h4 class="p6">Endnotes:</h4>
<p>1. See “<a href="http://www.fortnightly.com/fortnightly/2012/12/perfect-superstorm"><span class="s4">Perfect Superstorm</span></a>,” December 2012, and “<a href="http://www.fortnightly.com/fortnightly/2013/01/islands-storm"><span class="s4">Islands in the Storm</span></a>,” <i>Public Utilities Fortnightly</i>, January 2013.</p>
<p>2. See “<a href="http://www.fortnightly.com/fortnightly/2013/02/nerc-wire"><span class="s4">NERC on a Wire</span></a>,” <i>Public Utilities Fortnightly,</i> February 2013.</p>
<p>3. See <a href="http://www.defense.gov/transcripts/transcript.aspx?transcriptid=5136" target="_blank"><span class="s6">http://www.defense.gov/transcripts/transcript.aspx?transcriptid=5136</span></a></p>
<p>4. <a href="http://youtu.be/S3Yyv53dZ5A" target="_blank"><span class="s6">http://youtu.be/S3Yyv53dZ5A</span></a></p>
<p>5. “<span class="s4"><a href="https://www.fortnightly.com/fortnightly/2013/03/turning-energy-inside-out">Turning Energy Inside Out</a>.” <i>See also</i>, Christopher Mims, “<a href="http://qz.com/21909/hurricane-sandy-and-cell-phone-network-service/" target="_blank">In Sandy’s wake, here’s why millions of Americans have cell service but no power</a>,” <i>Quartz</i>, Oct. 30, 2012.</span></p>
</div></div></div><div class="field field-name-field-article-category field-type-taxonomy-term-reference field-label-above clearfix"><h3 class="field-label">Category (Actual): </h3><ul class="links"><li class="taxonomy-term-reference-0"><a href="/article-categories/distributed-generation">Distributed Generation &amp; Microgrids</a></li><li class="taxonomy-term-reference-1"><a href="/article-categories/security-reliability-cip">Security, Reliability &amp; CIP</a></li><li class="taxonomy-term-reference-2"><a href="/article-categories/strategy-planning">Strategy &amp; Planning</a></li><li class="taxonomy-term-reference-3"><a href="/article-categories/smart-grid">Smart Grid</a></li></ul></div><div class="field field-name-field-members-only field-type-list-boolean field-label-above"><div class="field-label">Viewable to All?:&nbsp;</div><div class="field-items"><div class="field-item even"></div></div></div><div class="field field-name-field-article-featured field-type-list-boolean field-label-above"><div class="field-label">Is Featured?:&nbsp;</div><div class="field-items"><div class="field-item even"></div></div></div><div class="field field-name-field-department field-type-taxonomy-term-reference field-label-above clearfix"><h3 class="field-label">Department: </h3><ul class="links"><li class="taxonomy-term-reference-0"><a href="/department/frontlines">Frontlines</a></li></ul></div><div class="field field-name-field-image-picture field-type-image field-label-above"><div class="field-label">Image Picture:&nbsp;</div><div class="field-items"><div class="field-item even"><img src="http://www.fortnightly.com/sites/default/files/1303-FR.jpg" width="1146" height="790" alt="" /></div></div></div><div class="field field-name-field-fortnightly-40 field-type-list-boolean field-label-above"><div class="field-label">Is Fortnightly 40?:&nbsp;</div><div class="field-items"><div class="field-item even"></div></div></div><div class="field field-name-field-law-lawyers field-type-list-boolean field-label-above"><div class="field-label">Is Law &amp; Lawyers:&nbsp;</div><div class="field-items"><div class="field-item even"></div></div></div><div class="field field-name-field-tags field-type-taxonomy-term-reference field-label-above clearfix">
<div class="field-label">Tags:&nbsp;</div>
<div class="field-items">
<a href="/tags/resilience">Resilience</a><span class="pur_comma">, </span><a href="/tags/distributech">DistribuTECH</a><span class="pur_comma">, </span><a href="/tags/dtech">DTECH</a><span class="pur_comma">, </span><a href="/tags/assault">assault</a><span class="pur_comma">, </span><a href="/tags/physical">physical</a><span class="pur_comma">, </span><a href="/tags/cyber">cyber</a><span class="pur_comma">, </span><a href="/tags/sandy">Sandy</a><span class="pur_comma">, </span><a href="/tags/katrina">Katrina</a><span class="pur_comma">, </span><a href="/tags/federal-energy-regulatory-commission">Federal Energy Regulatory Commission</a><span class="pur_comma">, </span><a href="/tags/ferc">FERC</a><span class="pur_comma">, </span><a href="/tags/north-american-electric-reliability-corp-0">North American Electric Reliability Corp.</a><span class="pur_comma">, </span><a href="/tags/nerc">NERC</a><span class="pur_comma">, </span><a href="/tags/leon-panetta">Leon Panetta</a><span class="pur_comma">, </span><a href="/tags/infrastructure">Infrastructure</a><span class="pur_comma">, </span><a href="/tags/amory-lovins">Amory Lovins</a><span class="pur_comma">, </span><a href="/tags/defense-science-board-task-force">Defense Science Board Task Force</a><span class="pur_comma">, </span><a href="/tags/regulatory">regulatory</a><span class="pur_comma">, </span><a href="/tags/operating">operating</a><span class="pur_comma">, </span><a href="/tags/structural">structural</a><span class="pur_comma">, </span><a href="/tags/obama">Obama</a><span class="pur_comma">, </span><a href="/tags/national-institute-standards-and-technology">National Institute of Standards and Technology</a><span class="pur_comma">, </span><a href="/tags/nist">NIST</a><span class="pur_comma">, </span><a href="/tags/pseg">PSE&amp;G</a><span class="pur_comma">, </span><a href="/tags/information-technology">Information technology</a><span class="pur_comma">, </span><a href="/tags/operations-technology">Operations technology</a><span class="pur_comma">, </span><a href="/tags/joe-weiss">Joe Weiss</a><span class="pur_comma">, </span><a href="/tags/stanford-university">Stanford University</a><span class="pur_comma">, </span><a href="/tags/reliability">Reliability</a><span class="pur_comma">, </span><a href="/tags/security">Security</a><span class="pur_comma">, </span><a href="/tags/hub-and-spoke">hub-and-spoke</a><span class="pur_comma">, </span><a href="/tags/microgrid">Microgrid</a> </div>
</div>
Thu, 28 Feb 2013 20:27:13 +0000meacott16473 at http://www.fortnightly.comTechnology Corridorhttp://www.fortnightly.com/fortnightly/2003/03-0/technology-corridor
<div class="field field-name-field-import-deck field-type-text-long field-label-inline clearfix"><div class="field-label">Deck:&nbsp;</div><div class="field-items"><div class="field-item even"><p>The next big trend is to make network resources more interchangeable and less expensive.</p>
</div></div></div><div class="field field-name-field-import-byline field-type-text-long field-label-inline clearfix"><div class="field-label">Byline:&nbsp;</div><div class="field-items"><div class="field-item even"><p>Jennifer Alvey</p>
</div></div></div><div class="field field-name-field-import-volume field-type-node-reference field-label-inline clearfix"><div class="field-label">Magazine Volume:&nbsp;</div><div class="field-items"><div class="field-item even">Fortnightly Magazine - March 15 2003</div></div></div><div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"><blockquote><p></p>
<h3>The next big trend is to make network resources more interchangeable and less expensive.</h3>
<p>Information technology (IT) infrastructure should be more like the infrastructure that generates electricity, IT consultants say, and at least one Texas utility is listening.</p>
<p>Forrester Research labels its vision for IT infrastructure "Organic IT" and promises that this new kind of infrastructure will save companies big bucks in the long run, without requiring a rip and replace of existing hardware and software.</p>
<p>But how much of this lovely vision is just IT consultant-speak?</p>
<p>Travis Crenshaw, vice-president of IT at TXU, says he has been looking at what Forrester calls Organic IT, and META Group calls adaptive infrastructure, since early 2002. For Crenshaw, this vision of IT infrastructure gives him and TXU the ability to spend the same money on IT, but "to ride it further," even with an increased workload for the department.</p>
<p>"After Texas deregulation, we still have other costs and projects to absorb-for example, a 200 percent growth in server infrastructure alone," he says. Despite such a large spike in work, Crenshaw has added only 20 percent more staff. So instead of outright savings, an organic approach may achieve a cost avoidance. Nonetheless, Crenshaw expects that by 2005, TXU will save 30 percent on IT.</p>
<p>In today's economic climate, it's easy to say that your company doesn't have the money to make dramatic structural or organizational changes, Crenshaw says. But that philosophy doesn't fly with him. People in an organization must be challenged to be creative about using resources, he says. Organic IT is one way his IT department has met the challenge of today's business climate.</p>
<p>In today's economic climate, it's easy to say that your company doesn't have the money to make dramatic structural or organizational changes, Crenshaw says. But that philosophy doesn't fly with him. People in an organization must be challenged to be creative about using resources, he says. Organic IT is one way his IT department has met the challenge of today's business climate.</p>
<h3>Restructuring IT</h3>
<p>Today's IT infrastructure requires every software application or computer network to have its own individual set of resources, whether servers, storage, or network connections. For example, most utilities use dedicated servers, disk storage, network access, and IT administrators for their PeopleSoft systems, and an entirely different array of those elements for their customer relationship management (CRM) package.</p>
<p>But it's a very expensive way to build an infrastructure. Forrester says large companies typically use approximately 20 percent of their total IT capacity. Imagine how many power plants the country would need if they used only 20 percent capacity for most of their operating time. That, in essence, is the structure of IT in today's large companies. It's akin to having electricity supplied exclusively by distributed generation.</p>
<p>Instead, Forrester says, IT should be structured more like the electricity grid, which spreads the power generation function amongst many plants and re-allocates power generation on the fly, as demand shifts or plants go offline for repairs.</p>
<p>In a nutshell, Forrester argues that within the next five years, IT will see radical overhaul and automation in four key areas: networks, storage, software, and processors. Those changes, the company predicts, will mean vast improvement-and overall lower ownership expense-in three areas:</p>
<p>Utilization. Organic IT will scale up, and down, to match computing demand load, without sudden failures of business capacity. For example, server space could be allocated to accounting during a quarterly closeout, then reallocated to a trading desk during a bid week. Right now, companies must buy enough server capacity to handle peak demand for each software application, and they cannot shift server space between applications.</p>
<p>Integration. Organic IT will quickly and easily connect dissimilar technologies, both within firms and between firms, with the ease of sending e-mail or surfing a Web site. In other words, supply chain management could become easier, because firms could talk to one another without installing a custom integration (see Fig. 1).</p>
<p>Manageability. Organic IT will automate installation, load balancing, failover, and recovery, leaving IT staff to manage unusual events. For example, instead of hovering over server load data every hour of the day, IT staff will be alerted only when there is an unusual breakdown (see Fig. 2).</p>
<p>Several technologies on the market fit into the Organic IT vision, says Frank Gillett, a principal analyst with Forrester. Companies can see significant savings almost immediately from implementing an Organic IT approach, he claims. The key is to focus on two areas that are already organic-compatible: storage and servers.</p>
<h3>P.O. Boxes for Computer Files</h3>
<p>Currently, storage allocated to an enterprise resource planning (ERP) system can be used only for that ERP system. It's wildly inefficient, Gillett says. Companies buy the storage they think they will need for a specific application for the next three years and then essentially stick those extra storage disks on a shelf until they're needed, he says. But Gillett says storage virtualization technology can change all that by allowing storage to be centralized and managed much more efficiently.</p>
<p>The payoff for moving to storage virtualization could be as high as a 30 percent savings on what companies currently spend on storage, according to Forrester.</p>
<p>Storage virtualization, Gillett explains, is the equivalent of a post office box address for storing data. A file name for locating specific data (e.g., e://users/johndoe/2003 3Q projections) becomes abstracted from the physical location of that data, so that data can be moved around onto different storage disks if overall storage needs dictate that change.</p>
<p>Forrester predicts that leading storage vendors like Network Appliance and EMC will soon deliver networked storage products that will make direct attached disks obsolete. But for now, existing storage architectures like SAN (storage attached network) and NAS (network attached storage) can be virtualized with products from FalconStor Software and Z-force, allowing companies to cancel expensive storage upgrades. (See box for additional Organic IT vendors).</p>
<p>At TXU, Crenshaw and his team have chosen the latter course, using a Hitachi product in conjunction with TXU's SAN environment to pool its storage. That approach has allowed IT to utilize 80 to 90 percent of its storage space, instead of the average company's 50 percent utilization rate. To Crenshaw, it's a good deal: "It's basic economics. [It's better] to be spending $1 and getting a 90 percent return instead of a 50 percent return," he notes.</p>
<h3>No More Fiddling With Servers</h3>
<p>In today's infrastructure, companies need servers dedicated to Web functions, network functions, particular applications, e-mail, and more. Most servers have a hefty amount of unused space in them-Forrester says on the order of 80 percent, while Crenshaw pegs the rate at closer to 50 percent. Whatever the number, it's not a high optimization rate. What drives such an inefficient, not to mention expensive, use of server resources is the necessity to maintain capacity for peak demand.</p>
<p>As Gillett says, "it's provisioning for maximum usage, even though [the capacity] is only used for a microsecond a year."</p>
<p>Until recently, little could be done to increase server utilization rates. While a company may have had 50 Web servers with a lot of idle capacity, it would take days of "fiddling and diddling" to rearrange software so accounting could borrow the Web servers, Gillett says. Rapid server provisioning promises to change that by automating changes in server configuration, transforming Web servers into accounting servers in mere minutes.</p>
<p>TXU has moved in this direction, with its recent purchase of four Sun Fire 15K servers and a bevy of X-series servers from IBM. The Sun servers are mainframe-class servers, Crenshaw says, but unlike traditional servers, they can be partitioned into various regions. Multiple business applications can run on those servers, he says, meaning that when accounting is preparing for a quarterly close, it gets more space, yet when the trading desk needs more server capacity for a bid week, that same resource can be reallocated there.</p>
<p>By not buying servers that will be underutilized, companies could save hundreds of thousands, if not millions, of dollars. While servers like IBM's X-series servers go for around $500 each, mainframe-class servers like Sun's Fire 15K start at more than $900,000. Putting off the purchase of even one mainframe-class server makes an immediate difference to the IT bottom line.</p>
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</blockquote>
</div></div></div><div class="field field-name-field-members-only field-type-list-boolean field-label-above"><div class="field-label">Viewable to All?:&nbsp;</div><div class="field-items"><div class="field-item even"></div></div></div><div class="field field-name-field-article-featured field-type-list-boolean field-label-above"><div class="field-label">Is Featured?:&nbsp;</div><div class="field-items"><div class="field-item even"></div></div></div><div class="field field-name-field-tags field-type-taxonomy-term-reference field-label-above clearfix">
<div class="field-label">Tags:&nbsp;</div>
<div class="field-items">
<a href="/tags/ibm">IBM</a><span class="pur_comma">, </span><a href="/tags/information-technology">Information technology</a><span class="pur_comma">, </span><a href="/tags/integration">Integration</a><span class="pur_comma">, </span><a href="/tags/it">IT</a><span class="pur_comma">, </span><a href="/tags/network">Network</a><span class="pur_comma">, </span><a href="/tags/storage">storage</a> </div>
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Sat, 15 Mar 2003 05:00:00 +0000puradmin11178 at http://www.fortnightly.comThe CIO Forum: IT Weathers the Stormhttp://www.fortnightly.com/fortnightly/2002/11/cio-forum-it-weathers-storm
<div class="field field-name-field-import-deck field-type-text-long field-label-inline clearfix"><div class="field-label">Deck:&nbsp;</div><div class="field-items"><div class="field-item even"><p>In the rough-and-tumble energy biz, IT departments are paddling hard to stay afloat.</p>
</div></div></div><div class="field field-name-field-import-byline field-type-text-long field-label-inline clearfix"><div class="field-label">Byline:&nbsp;</div><div class="field-items"><div class="field-item even"><p>Jennifer Alvey</p>
</div></div></div><div class="field field-name-field-import-volume field-type-node-reference field-label-inline clearfix"><div class="field-label">Magazine Volume:&nbsp;</div><div class="field-items"><div class="field-item even">Fortnightly Magazine - November 1 2002</div></div></div><div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"><blockquote>
<h3>In the rough-and-tumble energy biz, IT departments are paddling hard to stay afloat.</h3>
<p><b class="hook">The storm that Enron ignited last fall</b> shows little sign of abating. Information technology (IT) departments at every energy company have had to react to rapidly changing conditions, whether it be shrinking budgets or nervous workforces. Fortnightly interviewed the chief information officers (CIOs) at five very different companies-Williams, Duke, PJM, Pacific Gas and Electric, and the Sacramento Municipal Utility District-to find out how they're coping, and how they plan to chart a course through such turbulent waters.</p>
<p>At Williams, change threatens to capsize the ship. The waves rocking the company are reflected in the IT department, which is slashing its staff from 1,400 to 700. The company says the cuts will be completed by early next year-but there are no assurances that there won't be more. Yet Ron Mucci is navigating with a plan. He is determined to provide Williams with the IT services it needs to survive, even though it means shifting internal expectations from a "champagne … to a beer budget," he says.</p>
<p>In contrast to Williams, the waters that Duke is sailing in seem positively calm. But Cecil Smith faces his own set of challenges. He has to steer a course with a flat budget-at an organization that isn't used to one-and still find his way amongst the shoals of employee unrest, to keep one of the industry's leaders out in front.</p>
<p>For all the choppiness of the industry waters, some like PJM are riding the wave. Rather than face shrinking budgets, Nora Swimm is setting an IT course to support PJM's non-stop expansion.</p>
<p>On the West Coast, the U.S.S. Pacific Gas and Electric Co. is sailing into the uncharted waters of a contentious bankruptcy. Roger Gray's task is to keep a steady IT course and bring into dock a multi-year customer information system (CIS) project, while preparing to split his department if PG&amp;E's bankruptcy plan is approved.</p>
<p>And in the quieter waters of public power, Linda Hensley is preparing to run a tighter ship at the Sacramento Municipal Utility District. Faced with a wave of retirements over the next five years, Hensley plans to implement technologies that will increase efficiencies with fewer employees-the quintessential function of IT.</p>
<h3>Batten Down the Hatches: Williams Deals With 'Draconian' Cuts</h3>
<p class="interview">An interview with Ron Mucci, vice president and chief information officer, Williams Co.</p>
<h4>What were your biggest accomplishments and struggles in the last year?</h4>
<p>We've gone through incredible change [in] less than 12 months. Last year, there were four separate IT shops in Williams. There was a CIO for the pipeline, for the energy company, for the corporate group, and one for energy marketing and trading. So, basically you had four autonomous IT shops, and the only common thread was that the corporate IT shop managed the majority of the infrastructure, but they were kind of light in the sense that there weren't very many enterprise applications. So, they had a council that tried to find common ground, talk about events and best practices, and look for opportunities. At the very end of last year, they made a decision to put all of the IT group in corporate and move it to an enterprise function. . . . Well, the [shared services concept in the pipeline group] worked so well at the pipeline level that they took the shared services concept to the corporate level. In January, I was responsible for leading the transformation to enterprise of both finance and IT.</p>
<p>We have re-organized ourselves twice since then … [We] literally created an organization that didn't exist, from scratch. In six weeks' time we went from concept to literally naming it down to the employee level…</p>
<p>We roared through it. I remember the day we finished it, because it coincided with the day employees had to make a decision under our early retirement program. And that was our driver, quite frankly. We didn't think it was fair for employees to make decisions on taking early retirement when they didn't even know if they had a job.</p>
<h4>How has the IT department been impacted by the downturn in the merchant sector?</h4>
<p>[B]y late May, we were in a total stock price meltdown, and the world changed on us again. We were faced with the need for draconian cost reductions… Overnight, the projects were just getting whacked left and right. We started a process of calibrating the demand for our services.</p>
<p>We looked at 2002 as a baseline, looked at O&amp;M, G&amp;A, mandatory capital, expansion capital, efficiency capital. How much do you spend, whether it's expensed or capitalized? Whether it's mandatory or efficiency? We did that for 2002, and took a forecast for 2003. We were grinding these numbers into their capital budgets, so they could go back to our outside board of directors, and show them, here's what our businesses look like. We were a major part of their expenses.</p>
<p>Once we calibrated demand, we started looking at the supply side of the equation. Then what we did, we started down a process of what I call high-grading our organization. We created an 11-page template of talent assessment… We evaluated people with what I call a consistent Right Way, Right Results performance measure. What was kind of neat about that was, we had every manager rank every employee. Then we got all the managers in a room together, and they had to explain how they ranked every employee. It was real interesting. I remember one manager gave everyone in his group an exceptional rating. I didn't have to say one word before managers jumped up and said, get out of here, what makes you think your people walk on water? It opened up a really fantastic dynamic, and we got into a debate about what does exceptional performance look like. So it really level-set the playing field.</p>
<p>[T]hen we had to balance supply and demand. It's a nice way of saying we needed to reduce [the workforce]… Including contractors and employees, we're down 50 percent. So now, where are we?</p>
<p>After having gone through that, we're restructuring again, in recognition of the workload we have. We've got our demand and supply equation back in balance, we believe.</p>
<p>What are the challenges that lie ahead? Clearly, from just a people standpoint, we're in a break-fix mode, which is down to what you'd think of as mandatory kind of work. The challenge is, how do you keep people engaged? How do you keep them challenged, and make it a place to continue and thrive in their career? That's one big challenge. Our business is fluid. We may sell more assets-I don't know.</p>
<h4>What are your goals for IT in the next year at Williams?</h4>
<p>What we really want to do, as an IT shop-it's important to us that we provide the value-added services that our customers need to meet their business. So, the kind of activities I see us delving into-because we really haven't, other than organizationally putting us together, we really haven't had an opportunity to work together as one, because of the turmoil. What I would like to have is the opportunity to turn our attention to performance management, best practices, and benchmarking…</p>
<p>Our business isn't making widgets. So I think the challenge we've got is that our businesses are going to be under immense pressure to control costs-an understatement. They view us in effect like a third-party provider. What are our core competencies-that's a key question. And how do we know we're delivering those services in the most efficient way possible. I think we're going to see in the not-too-distant future, they're going to say, why don't you just outsource it?</p>
<h4>Outsourcing isn't much of a trend right now. Do you see that picking up?</h4>
<p>For us, we haven't historically outsourced a lot of application development work. I think that we'll move in the direction… I do think what's important is, whether I provide it or an outsourcer provides it, you've got to have a clear articulation of all the deliverables, and you have to have a clear articulation of the performance measures.</p>
<h4>What are the consequences of staff reductions and budget cuts?</h4>
<p>I'd like to see us put together a fairly high-level service level agreement. [But] as we dramatically change our services and reduce our size, I think there's going to be a huge disconnect with our internal customers at the staff level, who basically are used to champagne, and we're about to shift them to a beer budget. So the question is, how do you manage those expectations? We're radically changing the character and nature of the service we're providing. The people who are the officers and head of these companies are going, "Oh yeah, we've got to cut our costs, and I don't want to pay." And yet, the rank-and-file are the ones who consume our service. I don't know if they're getting the message or not… And, we need to have measures in place … If it's totally subjective, then we're setting ourselves up for just continuously getting beat over the head… Candidly, I think our core competencies are around those unique applications that are very customized [and] require a high degree of business knowledge. The more generic the application, the less customized it is. I don't know, to be honest with you, whether we are ultimately going to be the low-cost provider.</p>
<h3>Steady as She Goes: Duke Aims to Keep Up Morale</h3>
<p class="interview">An interview with Cecil Smith, senior vice president, information management, Duke Energy</p>
<h4>In the last year, what were your big accomplishments and what were your disappointments?</h4>
<p>We did spend a lot of effort, and therefore dollars, on security last year, with a series of projects. We continued to put "add-ons" to our financial ERP [enterprise resource planning], which was certainly helpful. We have continued to really highly utilize our information portal, which has information-not only news release-type information, but also benefit information, HR self-service information, all those kinds of things. . .</p>
<p>Additionally, we spent an awful lot-this is sort of the good side and the bad side-we spent an awful lot of money and effort around trading systems and risk management systems. Then that market for us has gone to a shambles, starting with Enron, and everything else that has taken place. We are still finishing up those investments, because still we fundamentally believe that the merchant energy market will come back. The real question for us is a matter of timing. We're not investing at quite the same clip rate as we were doing in the earlier part of the year, in that arena, but we are still investing, because we've got to finish those pieces of work.</p>
<h4>How long were you working on some of these projects?</h4>
<p>The risk management and trading systems have probably been as long as investments as we have probably had. [I]n our electric business line, we have completed a customer billing and information system. That was a six-phased re-engineering of a system that we have turned in the last few years back to Duke Power Co. It's been highly successful, and certainly needed, but what was key on that was really to turn out a phased deliverable that was important to that customer every six to nine months. We do not like big-bang conversions, because just too many times, your risk factor goes up. We always prefer the phased implementation, where you can start getting value as quickly as possible, and then like with anything, you continue to enhance it in subsequent and additional phases. That's part of the reason that we, like others, were named to the CIO 100. It was based upon our integration activity, things like our customer billing and information system, things like we were doing with integrating our acquisition of West Coast Energy in Canada, those kind of things. Another aspect of that is that we've changed-starting at the beginning of 2001-we've changed our total IT governance model, and that has worked well for us.</p>
<p>[T]he big change [has been] that we really are operating something called an information technology management team-ITMT. That has either the IT director or IT officer from each major business subsidiary, and we meet monthly, not only to agree upon standards and architecture delivery, but then to review major projects, to review major impacts, to make decisions, that sort of thing. It functions-to put it in the vernacular, it has really gelled in the last 18 months. I would say it is working the best I've seen it in the years I've been with our company [since 1995].</p>
<h4>Why did you change your IT governance model 18 months ago?</h4>
<p>As we matured as a new company [after the merger of Duke Power Co. with Pan Energy], what we realized is that there were many things we could do more from a common synergy standpoint, particularly in the IT operations arena-in IT security, in IT disaster recovery, IT telecommunications-all of those kinds of things. So really we looked at that and said, "OK, how can we operate going forward to accommodate the greatest types of synergies, come up with centers of excellence?"</p>
<h4>Do your business goals drive IT?</h4>
<p>Certainly. The reason-two comments on that. One, when we formed Duke Energy, we moved the business applications into the business units. Those applications have a dotted-line link, through the governance model, back to my office, as the corporate CIO. I do the enterprise applications, so whether that's financials, payrolls, HR, e-mail, or security, those kind of [things]. What is important to glean from that organizational alignment is it says that we are in step with the business units, in terms of what their actual business IT needs are. Therefore, we can deliver them. Operationally, we look at it and say, OK do we have the right infrastructure in place, the right networking connectivity, the right security certification guidelines, and all of those things. And in some cases, yes you do for some of those things like infrastructure, security, and firewalls. You've got to be continually reading not only your business units and where they are directionally going, [but also] where is the industry going, what new capabilities are there, and you're making investments in the operating infrastructure. At the end of the day, if you were to ask me what drives IT in this company, it is the business.</p>
<h4>What are your goals for the coming year? Where do you see your spending, and what are your big projects?</h4>
<p>At this moment in time one of the biggest goals I've got is keeping the staff motivated in a down economy, in a down industry segment. I don't think that's atypical, even in companies in different industry segments these days. But this industry segment has been through a lot. Every day you pick up the newspaper or you look on CNN, and you're not seeing rosy pictures, all you're seeing is bad news. Your staff-it isn't that they're running off, but they want reassurances that your [company is] going to be OK, that the industry and the economy is going to come back, etc. I expect that same thing to be felt in the telecommunications industry, look what they've been through, let alone our industry brethren, whether it's Dynegy, Williams, or others like that. It's the toughest of times for both managers and staff. Many of your staff who are in their 20s and 30s have never been through times like this.</p>
<h4>What are you planning to do to keep up the motivation?</h4>
<p>Well basically, it's management 101-manage by walking around, manage by being present, it's like where we are right now-from a budgetary standpoint we'll be flat on a year-by-year basis. But, what is important in that is that we are still supporting a good number of critical applications, most of which, or many of which, were already underway, as the economy has gotten worse and worse. The large message is to say to your staff, "We're still investing in those projects that are important to us on a going-forward basis, that are important to our baseload infrastructure," and those kinds of things. Call it re-emphasizing the basics, call it just being there. Sounds pretty elementary and pretty trite, but I would tell you it's probably as strong a tool as we can do at the moment.</p>
<h3>Setting Sail: PJM Has Eye on Growth</h3>
<p class="interview">An interview with Nora Swimm, executive director of information services, PJM</p>
<h4>How long have you been with PJM?</h4>
<p>About one and a half years. . . I'm still learning a lot about the [energy] industry itself. The technology challenges and issues seem to be consistent from organization to organization, though.</p>
<h4>What are some of those consistent challenges?</h4>
<p>I would say a lot of times, it's people. It starts with making sure you have the right staff, in the right positions. . . Also, making sure as an organization, that you are tightly aligned with the business areas you are supporting. Again, that's been a consistent challenge that I've seen in all the organizations where I've worked, that really I think IS [information services] organizations provide the most value when they understand the business, and then can bring the technology solutions to bear. . . One of the things, when I first came to PJM, I looked at how we were organized in our IS department. Our departments were more aligned around technical/functional organization. I had the developers in one department, the database administrators in another, the network folks in another-I took a look at that, and working with the management team, talked about where we were, and where we wanted to get to, and business alignment was clearly one of those areas that we thought there was an opportunity to get better aligned with the business clients, the markets, and the operations. We reorganized ourselves, so that instead of having those technical departments, we now have departments aligned with the business areas that we supported. So we then became a single point of contact for those business areas, and the staff is now focused on understanding both functionally, the business areas they support, as well as the technology to support that business.</p>
<h4>Would you say that realignment was the biggest accomplishment of your last year?</h4>
<p>From a personal perspective, yes. As an organization, we have supported business initiatives, which included our PJM West initiative, as our market grows out to Allegheny. The IS group played a key role in managing the infrastructure and the application development that needed to occur to make that successful. We are also in the process of planning for the next wave of market growth. The PJM West experience was sort of our test case to understand what the impact would be, and from an IS perspective it touched really all aspects of innovation. Infrastructure, planning, application development, security-it touched every area. So we're using that experience as the basis for the larger market growth that's ahead of us.</p>
<h4>If you could look back on the PJM West outgrowth, what was the biggest lesson you learned from that experience?</h4>
<p>One of the things, when I came on board, was that we had had a team in the IS group that had been identified as the "PJM West team." While it involved a lot of the staff, one of the things that I was concerned with was that I had three or four senior staff members who were on this team, and they were [all] functioning as the point of contact and liaison back to the business area, and doing the planning, etc. ...</p>
<p>I wanted one person who was accountable. So I looked at the team and made a decision that I would pick one of the senior project managers to take on that role. . . [T]hat turned out to be a critical decision, getting a single person designated. That person did extremely well. [That person] became the focal point and the coordination and that bridge between the business area and the IS group. . .</p>
<p>[I]n the middle of that, we were faced with the September 11 tragedy. That indirectly affected us, in that we had hardware on order. What ended up happening was that vendors were looking to respond to the urgent requests coming out of New York. They wanted to reprioritize requests to the New York companies that were trying to get back on their feet after September 11. So we worked with those vendors to look at our schedule. We ended up making some changes and modifications . . . It did cause a couple late nights, and people coming in on weekends, but I think it was worthwhile in supporting that objective.</p>
<h4>How are you handling the PJM market growth, and how are relationships with SPP and MISO impacting your IT group?</h4>
<p>With respect to the Midwest ISO (MISO) and Southwest Power Pool (SPP), we established that letter of intent in January, establishing the joint common market. Since that time, we've had regular meetings with the larger group, to talk about what is a joint common market, what is the business benefit, [and] when we talk about the infrastructure, what would be the decisions. A major component of this initiative is the one-stop shopping for the members who would be using this environment. So we identified the enhanced market portal, which would be that singular entrée into the market, whether they were going to the Midwest or PJM. We have started talking about, from a technology standpoint, what would we need to do. A lot of it comes back to making sure we get standardization around data and nomenclature-that's really going to provide a lot of value to the market participant. Today, if they want to transact business in the Midwest or PJM or whatever region, it's different nomenclature, different rules. . .</p>
<p>[W]e need to get a larger, scalable solution to meet the needs going forward. Billing and settlement is an example of one of those applications areas. For example, one of the things that we've been doing in working with MISO and SPP is understanding what decisions have they made recently around those applications and those functionalities. We're looking to see if there are opportunities for synergy around vendors and licensing, so that we could leverage that as we go and move toward the joint common market, which is on that two- to three-year horizon. . . If we have those discussions and make some of those decisions today, it will simplify what we have to do going forward.</p>
<h4>For an enhanced market portal, will all the grid operators need to use the same type of software?</h4>
<p>What we've discussed to date around the enhanced market portal is that, working with MISO, SPP, and PJM, we've been talking back and forth, trying to define first what it is we want, and then evaluating what technology is out there to meet the needs. We all agree that it's critical to agree first on what it is we need, and then to meet the need. With respect to the technology, we're looking at a joint technology solution around that portal. What we haven't decided yet is whether that solution will run centrally as one version, or if [it will be] the same solution running decentralized.</p>
<h4>Going forward, what are your top two or three goals for the coming year?</h4>
<p>Over the next 12 to 18 months, our focus is on the market growth that's ahead for PJM, which speaks to integrating the former Alliance members into PJM, and supporting the joint common market for the MISO/SPP and PJM. . . [W]e need to lay a lot of the groundwork, the planning, and start some of that work, in order to be successful in the 2004-05 timeframe, where we do have specific deliverables.</p>
<h3>Steering toward Shoals: PG&amp;E Readies for a Breakup </h3>
<p class="interview">An interview with Roger Gray, vice president and chief information officer, Information Services and Technical Services, Pacific Gas and Electric Co.</p>
<h4>What's been happening with IT at one of the nation's largest utilities in the last year? How has the bankruptcy affected your department's work?</h4>
<p>Our day-to-day work to support the utilities is largely unchanged. We had major projects kept on track and [we] intend to complete [them]. It didn't have any significant budget impact or project impact, because we're so driven by maintaining a large infrastructure-we continue to have to support that-and we had, for example, projects like a new customer information system that we are continuing to build and are launching in December. The day-to-day support almost feels like status quo, in terms of plans and effort. But, because our plan of bankruptcy reorganization splits the company, we are also having to figure out how we would go about splitting the IT systems, or a reverse merger, if you will.</p>
<h4>Without a firm decision from the court, are you able to do a lot of planning for that?</h4>
<p>Yes, we are actually doing planning, and we're actually doing work. In fact, we're required-before we spend dollars on those kinds of things-we have to file motions with the court. Those have been done over the last several months, and I can't remember the numbers of motions, but several have been approved that allow us to do that kind of work, that is outside the normal course of business.</p>
<h4>What were your biggest accomplishments in the last year?</h4>
<p>That question would be much more relevant in December. We have several new, major systems that are coming together toward the latter half of the year. The fact that these projects are going to land is a major accomplishment. Even under normal circumstances, they would have been challenges. The fact that we've been in bankruptcy, kept people focused, not worried about where the bankruptcy may take us, eventually, keeping our eye on the ball-that applies to the networks we operate, the 700-plus applications that we have to support the various businesses processes within PG&amp;E. Fundamentally, keeping our eye on the ball for that stuff we operate, as well as keeping our projects on track.</p>
<h4>What are the biggest projects you are working on?</h4>
<p>The big one is our CIS system. That is a gigantic system, it's our core billing and customer relationship system. That's scheduled to go live December 6. We also at the same time are launching several new call center applications, and we're updating many of the call center applications we have. We also have field dispatch systems that we're going to be upgrading, and launching new ones. Related to all this, we also have enterprise application integration (EAI) project. We've actually gone live with that, but it really gets tested when all this new stuff comes online. It's the confluence of several major initiatives and projects that are coming in. Once we do this, the only remaining legacy system that we will have is our HR/payroll system, which we eventually hope to tackle, maybe as an 2003 or 2004 initiative.</p>
<h4>What motivated these projects and when did planning begin?</h4>
<p>They had been planned for many years. EAI has been planned for about a year now, that was relatively late in the mix. CIS has been a project for several years. There were a variety of drivers. EAI, the driver is the ability to integrate the applications in a smarter way. Historically, we tied everything together on a point-to-point basis, which is the cheapest thing to do short-term, but becomes very cumbersome long-term. Basically, we had to start over with how we approach that. That was a strategic IT initiative. The CIS was driven by the traditional things that drive you to replace legacy systems-obsolescence, and lack of functionality.</p>
<h4>When you work with other managers at PG&amp;E, how do IT priorities get set?</h4>
<p>We have a variety of things that we use to drive IT spending, initiatives, and priorities. It ranges from very tactical, where people focus on specific technologies and their appropriate selection, to strategic, which is the management committee of the company and officer IT council that basically sets the high-level policies. That's where, for example, the IT council would say, do we have a strategic goal to get ourselves off legacy systems or not? The details of specific projects would be handled at information technology committees that are much more tactically focused. It's really the relationship of all the things working together that's the important part, I think.</p>
<h4>Do you use the council to align IT goals with the company's overall business goals?</h4>
<p>Yes. This is a very strong philosophy that I have, that you start first with the business goals and business strategy, then you develop an information technology strategy to support it, and finally you look at the information technology choices, products, and services to support that. What was oftentimes happening was that a vendor would come in and show some technology, and people would get wowed by it-the wow factor-and we would then work from the technology toward the business process strategy. So [now] it's the business strategy, the business process, then the information strategy, then the technical tactics that we follow with. That's the order we try and stay with.</p>
<h4>If the bankruptcy reorganization plan is successful, how are you going to divide your IT department?</h4>
<p>The plan of reorganization only applies to Pacific Gas and Electric Co., and that is to take what is a highly integrated, coupled IT function, which would be required to be split to support what will become two corporations, and within one corporation will be three or four different companies. We will have to split the IT function, which means the resources and infrastructure, and the people as well. Both companies will need IT personnel. I have not figured out yet if breaking IT up is harder than merging IT, but it's not easy.</p>
<h3>All Hands on Deck: SMUD Doing More With Less</h3>
<p class="interview">An interview with Linda Hensley, director of business technology and change management, Sacramento Municipal Utility District (SMUD)</p>
<h4>What have your challenges and goals been the past year, and what are you planning for the future?</h4>
<p>I'm not actually from the technology area. I manage technology projects in the customer area. . . So the first year we focused on getting the bigger re-engineering initiatives done. We're still doing more of them this year. This year we've been working on implementing more of those. As part of that we had been working with the district at the corporate and executive level on alignment between business and technology, and generally between the business units themselves. We put into place-this was both technology change management and executive alignment-executive dashboard, and a pay-for-performance program link to the dashboard and the metrics. All of that was technology-enabled, and also part of our business process re-engineering.</p>
<h4>What is your dashboard concept?</h4>
<p>If you look on the GE Six Sigma Web site [<a href="http://www.ge.com/sixsigma]">www.ge.com/sixsigma]</a>, you see their dashboard. I didn't know this at the time we designed ours, but ours is kind of similar to that. I think most companies now are headed in that direction, where you have a Web-based dashboard that has the company metrics posted at least monthly, if not more often, depending on what they are. Every employee in the district has visibility to that, and can know that their pay-for-performance programs are linked to the success of the company, and what the priorities are. It basically aligns the whole company around common objectives. . .</p>
<p>Our big focus is around efficiency and productivity improvements. A lot of that is technology-enabled, and so most of my focus and my goals over the next three or four years are to digitize all of our processes, and do a lot of efficiency improvement. Partly because the average age of our workforce is 49, so we're expecting a lot of retirements-I don't know what the average length of time is, but our employees have been here really long periods of time, so most of them can retire by the time they're 55. So we're expecting a big wave of retirements, which gives us the opportunity to go behind those people and automate the processes that they're in. So that's what I'm headed towards, automating as many of our processes as we can. To do that, we have to re-engineer all the processes. I have a lot of people who are business analyst types, for the technology side, but are also process re-engineering people.</p>
<h4>What has your strategy been to get your workforce to be more accepting of change and new technological approaches and strategies?</h4>
<p>We have integrated change management with technology rollout. . . We have a lot of hard lessons that we've learned. We've gotten pretty good at it. We just work really, really hard at making sure people are comfortable with why we're doing the technology, how to use it, how it's going to affect them, and giving them lots and lots of support as they adapt to it.</p>
<h4>Can you give an example of a project that went wrong, and the lessons you've learned from the experience?</h4>
<p>When we rolled out SAP, it was probably the biggest technology project we've ever done. We had a project team under contract to deliver the project on time and on budget. We tended to focus on that instead of the impacts on the organization. . . [But] we didn't really look at the processes in the call center to examine how they may have needed to change to the new technology. We had taken the supervisors off the phones, so they could do more coaching of the customer service reps, but [the supervisors] didn't know how to use the new technology. So since they weren't ever using it, they couldn't help coach their employees on how to use it, plus they ended up being negative about it, because they saw the falloff in productivity because of the new technology, and they weren't really expected to use it themselves. So not only did we lose 10 people that should have been on the phones, we lost their support. Now, looking back on it, it just seems so-I mean, how could you not know? . . . The summary of that really is to look at how, even if you've just re-engineered, look at how your processes may need to change to facilitate the rollout of a technology project. Like putting everybody on the phones.</p>
<h4>What sorts of projects are you working on now to improve efficiency?</h4>
<p>One of the big, simple, quick success stories we had this year was automated time entry. . . So that was just an easy one, but we're also doing a lot of employee self-service. . . We're going 100 percent online recruitment by early next year.</p>
<h4>What are your specific goals going forward?</h4>
<p>What I did, I just adopted what-when Jeff Immelt first took over for GE, he said in an interview that he planned to digitize his back office and reduce it by some amount-I think it might have been 75 percent. And so I kind of adopted that, and said we could reduce our back office process support by 50 percent. I'm not really translating that into employee reductions, as much as I am in just a combination of not having to replace retiring employees, and improved productivity in other employees.</p>
<h4>What other things are going to get a big part of your budget?</h4>
<p>Next year the biggest project for us is two-way radio, the GIS outage management storage is sucking up everything, we have a big upgrade project for SAP that starts next year and we're buying a lot of the infrastructure for that next year, and we just on an ongoing basis have a lot of customer Internet and employee Web applications that we're supporting.</p>
<h4>Experts say that outsourcing is making more sense for companies like SMUD than for the Dukes of the world. Is that true?</h4>
<p>Yes, we're going out for an RFP to look at options around outsourcing our SAP solution, for all the hardware and the maintenance. Part of my driver there is business continuity, so if I can get a big data center, I think it could be cost effective for them to provide us not only the hardware support for our SAP application, but they would also have better backup than we have right now. I'm hoping to see if I can get that for less than having to set up my own hot site somewhere.</p>
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Fri, 01 Nov 2002 05:00:00 +0000puradmin11517 at http://www.fortnightly.comInformation Architecture: Building the Right Foundation for Customer Choice in Energyhttp://www.fortnightly.com/fortnightly/1999/09-0/information-architecture-building-right-foundation-customer-choice-energy
<div class="field field-name-field-import-byline field-type-text-long field-label-inline clearfix"><div class="field-label">Byline:&nbsp;</div><div class="field-items"><div class="field-item even"><p>Eric Cody</p>
</div></div></div><div class="field field-name-field-import-volume field-type-node-reference field-label-inline clearfix"><div class="field-label">Magazine Volume:&nbsp;</div><div class="field-items"><div class="field-item even">Fortnightly Magazine - September 15 1999</div></div></div><div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"><p> The crazy quilt emerging in restructured markets only impedes competition. </p>
<p> The enthusiasm among energy retailers has become infectious. It grows as each successive state opens its market to competition. Yet behind the promise lies a grim reality. </p>
<p> Retailers struggle against a tide of thin margins, high customer-acquisition costs, inconsistent rules and regulatory prescriptions for the unregulated market. With all the rulemakings and workshops, the dollars budgeted by utilities to implement retail choice rise above even the level of spending to eradicate the Y2K millennium bug. Corporate strategy slips back and forth as if caught between the flippers in a pinball game. And customers, the target of all the economic affection, often seem aloof - torn between the safe haven of consumer protection and the allure of risk-based pricing. In short, customer choice experiences make apparent the need for new approaches in order for the larger market to succeed. </p>
<p> One problem is the diversity in approaches to information handling among restructured states. Lack of a coherent model for information processing, transfer and optimal use for market operations marks a key failing for which a remedy must be found, and soon. To the extent that can be done, the odds will improve that direct access will deliver economic benefits to customers. Failure to standardize the information architecture almost certainly will spell the demise of many competitors and delay the next stage of energy deregulation. </p>
<p> Patchwork of Markets </p>
<p> and Processes </p>
<p> A new competitive energy market is moving ahead in select locations - California, Massachusetts, Rhode Island, Pennsylvania - with others soon to follow. Lawmakers and regulators in most remaining states have begun to consider competition as a viable alternative to monopoly regulation. About a dozen states have lurched forward with implementation plans. As a result, what exists in the United States cannot be described as a market or series of markets, but state-level re-regulation, a tentative step toward a national energy market. </p>
<p> Re-regulation means different things in different states. Is it wholesale competition or retail, or both? Which comes first? Is competition a tool for serving residential and small-business customers, or just large industrial companies? And what parts are competitive - energy alone, or related services like billing and metering, as well? Should competition be introduced to customers all at once, or in phases? </p>
<p> To specify a competitive infrastructure, plus the information architecture that must accompany it, one needs consistent business processes. Yet even a superficial review of recent U.S. industry experiences suggests that the utility wheel is being reinvented in every state and franchise area. Despite the recent launch of several consensus-building initiatives, regulators appear not to recognize the need to consistently enable the market processes and information flows that must work well in order for consumers to realize long-term benefits. (Among such initiatives are the Utility Information Group, Collaborative for Uniform Business Requirements, the North American Electric Reliability Council's Retail Access Working Group, and the Edison Electric Institute's consensus-building process for uniform business practices.) </p>
<p> Most experts agree that several conditions must be met for energy competition to succeed: </p>
<p> - A liquid and mature wholesale market for each energy commodity; </p>
<p> - Retail offers made to mass-market consumers; </p>
<p> - Financial risks made manageable and hedgeable; </p>
<p> - Market power not concentrated among a few participants; </p>
<p> - Consumer confidence maintained; and </p>
<p> - Information requirements of the competitive energy marketplace must be addressed effectively. </p>
<p> Information technology (IT), and the Internet in particular, can enable market transition and help address painful information problems already being felt in states that have restructured. (See sidebar, The Internet: Tomorrow's Solution Today.) </p>
<p> The Front Lines of Choice: </p>
<p> Trial and Tribulation </p>
<p> To appreciate the need for timely information flows and processing, one need only survey the plight of those who have forayed into competitive energy markets. Retailers, utilities and customers are suffering startup pains of what might be called the market's Pleistocene Epoch. Many of the startup problems stem from unmet information requirements, generally associated with the relationships, transaction flows and operational dependencies depicted in figures 1 and 2. </p>
<p> Retailers, for instance, have experienced a harsh and unforgiving market characterized by lack of financial-hedging instruments, razor-thin margins on the commodity, a state-by-state approach to market rules and, ironically, a national economic cycle so favorable that it is difficult to draw corporate customers' attention away from revenues to cost-reduction. Thus, weak performance by an energy marketer in handling any retail transactions can spell doom. </p>
<p> Utilities, while not necessarily exposed to the same threats as retailers, have found themselves on an unfamiliar voyage without a navigational chart. Some are forced to divest or separate their generation assets and subsequently find themselves on a competitive playing field. After settling recovery of generation-related stranded costs, utilities naturally tend to perceive moves toward competitive metering and billing as potential sources of new strandable costs. Moreover, utilities' existing information systems typically don't meet the new requirements being created in the marketplace. And on top of all that, rate freezes generally are a key part of most utility settlement agreements related to choice. There are new risks and cost pressures, accompanied by new rate limitations. </p>
<p> For the nation's rural electric cooperatives and municipal electric systems, customer choice often includes the need to apply market rules designed for investor-owned utilities. These rules do not fit the scale or nature of co-ops and munis. In addition, these utilities' relative smallness creates extreme budget pressures and calls for creative approaches to implementation. Implementation costs, it turns out, do not necessarily shrink in proportion to the smaller number of meters served. </p>
<p> Last but not least, customers have experienced the confusion of a major change in the way they are served, offers that are competitive but not necessarily comparable, a benchmark price for comparison that is set by regulatory order rather than market processes, and a sense of exclusion from the design process. The revolution is not customer-driven, and sometimes the results reflect lack of adequate customer involvement. </p>
<p> Help is needed, and the good news is that promising business approaches and technology are available for immediate application where there is the collective will and shared sense of urgency. </p>
<p> Market Problems With </p>
<p> Technological Solutions </p>
<p> The requirements retailers face as they expand service into new states tend to be different each time. Customer-enrollment processing, available billing models, formats for electronic market transactions, data content requirements and even load-profiling approaches generally are non-standard, and this reality drives administrative overheads upward. These non-standard processes and protocols - and their extra costs - obstruct entry for some retailers, and ultimately may precipitate decisions to bypass some markets. Specific problems seen in new markets include: </p>
<p> - Interface requirements unique to jurisdictions and franchise areas, </p>
<p> - High acquisition costs for retail customers, </p>
<p> - Commodity margins so thin as to make the business unsustainable, </p>
<p> - Inconsistent rules about measurement vs. estimation of retailer loads, </p>
<p> - The non-liquid wholesale market, </p>
<p> - Difficulty reconciling wholesale power bills against retail usage, </p>
<p> - The ill fit of load profiling when markets mature and become liquid and volatile, </p>
<p> - High transaction volumes unforgiving of less-than-robust systems, </p>
<p> - Bottlenecked customer-usage information, </p>
<p> - Inflexible customer information systems unable to process the required data, and </p>
<p> - Divergent rules for electricity and natural gas in the same territories. </p>
<p> One way to structure discussions about these new information requirements and how they may be accommodated is to consider the information elements each party needs and when, and how the process of defining information requirements has changed. Obviously, these decisions and responsibilities are no longer left unilaterally to the utility. The table on pages 46 and 47, Information Requirements of Customer Energy Choice, highlights but a small number of the observed problems related to information architecture. The issue of who performs which information-related processes can be debated later. </p>
<p> The table provides a framework for constructive debate about how to solve these problems, as a prerequisite for consensus building. By considering how each problem affects key processes, one can infer the extent to which retailers, utilities and others will be committed to solving them. By pointing out the consequences of failing to respond, one can underscore the value of stakeholders coming to the table and negotiating. And by structuring potential solutions into opportunities for standardization, centralization, outsourcing and enabling by Internet access, one can broaden stakeholders' appreciation of both the objectives of an overall architectural framework and the latitude they may have during negotiations to realize their own interests. </p>
<p> The goal, make no mistake, is to begin serious negotiation among stakeholders that will lead to the sometimes small shifts in positions necessary to come to agreement on an initial set of best practices, which can be expanded upon later. </p>
<p> Eric Cody is president and founder of the retail access advisory group of NEES Global Inc., a consulting practice that advises clients serving more than 31 million meters in 30 U.S. states and four foreign countries on the detailed business processes and operating requirements of customer choice. The opinions expressed in this article are the author's alone and do not necessarily represent the views of NEES Global Inc. or its affiliated companies. </p>
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Wed, 15 Sep 1999 04:00:00 +0000puradmin9627 at http://www.fortnightly.comInformation Technology: It's Not Just Business Anymorehttp://www.fortnightly.com/fortnightly/1996/03-0/information-technology-its-not-just-business-anymore
<div class="field field-name-field-import-byline field-type-text-long field-label-inline clearfix"><div class="field-label">Byline:&nbsp;</div><div class="field-items"><div class="field-item even"><p>Karl Rabago</p>
</div></div></div><div class="field field-name-field-import-volume field-type-node-reference field-label-inline clearfix"><div class="field-label">Magazine Volume:&nbsp;</div><div class="field-items"><div class="field-item even">Fortnightly Magazine - March 15 1996</div></div></div><div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"><p>Computer systems must move beyond insular needs (billing and work orders)</p>
</p>
<p> to marketing opportunities. But few regulators really understand. </p>
</p>
<p> Everywhere we see the march of technology, especially computer and information technology. Pagers hang on nearly every belt or bag, PDAs have replaced notebooks and portfolios, computers sit on more home desks, and every major magazine and almost every daily paper has sections dedicated to news about the Internet. </p>
<p> Virtually every office desk holds a computer, offices are connected by networks, and networks connect offices around the globe. Our auto repair specialists must have computers for the complicated components in our cars. Card catalogs have been replaced by CD-ROM systems. Even the grocery store scans purchases, debits customers' bank accounts, and automates inventory, stock ordering, and accounts. </p>
<p> To the casual observer, the computer and information revolution has missed the electric power industry. Outside our homes and businesses, a mechanical meter, just like the ones that have been there for decades, turns quietly, registering incomprehensible information that must be physically read and translated into a bill that reliably arrives every month. </p>
<p> What we see as individual customers, however, disguises a revolution. The electric utility industry, too, is caught in the technological whirlwind, as are the other utility sectors, from natural gas to telecommunications. Utility managers are now offered a host of new information technologies that will allow more efficient operations, better data collection and retrieval, and better decisions. </p>
<p> The range of options, the nature of the technologies, and the decisions about when and how to acquire them for maximum benefits are complex. These complex decisions are difficult enough in times of monopoly service provision, but exponentially more complex when competition lies on the near horizon, where functional or actual unbundling, delamination, and disaggregation of the traditional utility business is now openly discussed across the country. The reliable certainty of the franchise service territory and the allowed rate of return are at serious risk of being replaced with a mere chance to compete. </p>
<p> Unfortunately, information technology is one aspect of the electric utility business few, if any, regulators really understand. No computer has a 40-year expected life. Information technology systems mean increased efficiency, but often have high front-end costs and short depreciation lives. And information technologies are not just tools for doing today's business better, they are tools for competing. </p>
<p> Utilities historically have used information technologies for a number of internal purposes. Customer information systems ensure that the "reliability" of billing parallels the "reliability" of the service delivery system. Automated mapping/ facilities management systems manage a utility's physical facilities to ensure engineering efficiency and cost containment. However, information technologies were seldom used by executives or regulators to support decisionmaking (em to help marketing staffs target market segments for special promotional campaigns, to help management evaluate the potential threat of a competitor, or to help regulators evaluate alternative transmission siting corridors or graphically view the facilities and interconnection issues related to a proposed merger. </p>
<p> Today, utilities use related types of spatial information technologies to improve work order management, outage recovery, resource planning and optimization, power flow modeling at the distribution and transmission level, and power system control. But these systems were developed to meet the discrete and insular needs of each aspect of a utility's operation, and rarely integrated into the decision-support systems utility executive teams will need to position the utility for a competitive future. </p>
<p> The surviving utilities in the new competitive regime will not only need to provide different services and products, but to conduct business differently. Utilities face the challenge of developing a better understanding of their customers' individual wants and needs. To meet that challenge they will need to comprehensively integrate disparate information sets, add business geographic applications software and data sets, and incorporate creative subjective judgment from the executive team. The wider understanding utilities gain from integrated information technology will help them segment market opportunities (em to determine which segments to pursue and to price their services and products appropriately. </p>
<p> Regulators have protected utility executives from such challenges. Regulators have a conscience; the market does not. The competitive marketplace will require a more flexible regulatory approach. Regulators will oversee broad market directions, act in a consumer protection role, and focus on antitrust issues. The era of full-blown prudence reviews and oversight that can stifle competitive markets from working efficiently is over. </p>
<p> Regulators can use information technologies to help evaluate siting and interconnection requests, to help identify and analyze "stranded" assets claimed by jurisdictional utilities, to help analyze a utility's response to a service interruption, to enhance performance-based regulation initiatives by benchmarking utilities against minimum service standards and then monitoring and reviewing the utility's actual performance. </p>
<p> The transition to this type of environment at regulatory commissions is already underway. Texas makes dockets, rules, and other information available to the public on the worldwide web. New York runs a pilot program that uses geographic systems technology to handle siting/distribution and transmission certification issues. And regional quality of service oversight committees, such as the 14-state regulatory committee that monitors U S WEST, may find considerable benefit in using information technology to monitor service standards and coordinate regulatory initiatives. </p>
<p> Technology is reshaping the utilities industry in ways that were unimaginable only a few years ago. If I were still a regulator, I would aggressively deploy information technology to avoid becoming what some jokingly refer to as a "stranded regulator" in the competitive future. Without information technology, utility executives as well as regulators could become "stranded." Think about it! t </p>
<p> Karl Rábago is deputy assistant secretary for utility technologies at the U.S. Department of Energy. He served on the Texas Public Utility Commission from 1992 to 1994.</p>
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Fri, 15 Mar 1996 05:00:00 +0000puradmin8380 at http://www.fortnightly.comCompetitive Intelligence: An Antidote to Downsizinghttp://www.fortnightly.com/fortnightly/1996/03-0/competitive-intelligence-antidote-downsizing
<div class="field field-name-field-import-byline field-type-text-long field-label-inline clearfix"><div class="field-label">Byline:&nbsp;</div><div class="field-items"><div class="field-item even"><p>Glenn E. Montgomery and James P. Spiers</p>
</div></div></div><div class="field field-name-field-import-volume field-type-node-reference field-label-inline clearfix"><div class="field-label">Magazine Volume:&nbsp;</div><div class="field-items"><div class="field-item even">Fortnightly Magazine - March 15 1996</div></div></div><div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"><p>Cutting employees</p>
<p>may be less than healthy, unless you're ready to replace them with technology. </p>
<p> As competition intensifies, increasing numbers of executives are realizing that customer service may have a more important role now than just placating regulators. After all, the broad spectrum of customer service is the principal way (em other than rates (em to differentiate a utility product and the utility itself. </p>
<p> Executives face the added pressure of trying to maintain profitability to retain shareholder value. One popular way to do that has been through downsizing, a process that has cut thousands of jobs and selected assets from the electric, natural gas, and telecommunications industries in recent years. One of the most recent and most dramatic downsizings: AT&amp;T and its decision to cut 40,000 jobs during 1996 for competitive purposes. Reported job cuts in the telecommunications industry are approaching 200,000 positions. </p>
<p> Eliminating mid-level utility managers helps strengthen the bottom line of electric, natural gas, and telecommunications companies in the short term. In the long term, however, the loss of these positions could create a decision-support vacuum (em a missing link in the communications channel between upper-level managers, field service crews, business unit managers, and customer representatives. This vacuum represents a downside of downsizing. </p>
<p> Many utilities have built a wide array of information technologies in recent years. The key problem is that these systems in the past counted on people linkages and have not been integrated as systems per se. The individual technologies have not been able to talk to each other, and so fall short in helping to support decisionmaking. At the same time, downsizing has eliminated many of the mid-level managers who formerly did this work. As a result, integrating and/or upgrading information systems so that they "talk" to one another is increasingly critical. Information technology tools known as spatial information systems can enhance executive decisionmaking. </p>
<p> Spatial information systems, and related technologies known as Geographic Information Systems (GIS) and Automated Mapping/ Facilities Management (AM/FM) systems, have gained widespread use among utilities in recent years. The reason is straightforward: This technology is a single tool to manage the technical and spatial information about facilities; their relationship to customers, products, or services; and the land environments in which they operate. GIS serves as the critical </p>
<p> platform for integrating key information technologies into an effective executive decision-support system. </p>
<p> A utility can use integrated systems with geographic analysis to support a wide variety of business issues. BellSouth Telecommunications Inc., West Ohio Gas Co., and Kentucky Utilities Co. are three different, yet representative, utilities that use spatial information systems and GIS to support their business goals and address a variety of reliability, customer service, and emergency response issues. </p>
<p> BellSouth Telecommunications. BellSouth Telecommunications Inc. (em the nation's largest regional Bell operating company, with more than 21 million local access lines (em is automating its manual outside-plant engineering and design processes throughout its nine-state territory. The </p>
<p> company's fast-track Outside Plant Engineering and Design System (OPEDS) will integrate BellSouth's information repositories and automated facilities management systems into a single corporate-wide database. This database will identify all current outside plant locations and streamline online planning and design work for new service provisioning. </p>
<p> The spatial information system being installed at BellSouth will permit the utility to rapidly and extensively upgrade its telecommunications infrastructure as its business grows. A parallel system will estimate the cost of new installations as engineers design them. In short, BellSouth will be able to speed up its response time to requests for new service. Speedy response time offers not only significant competitive advantage, but also a long-term commitment to providing superior customer service. </p>
<p> West Ohio Gas. Like many local gas distribution companies, West Ohio Gas is expanding its service territory and improving its customer service. The company's strategy is to adopt information systems that enable better decisionmaking, help the utility control costs, and allow it to spend operations and maintenance dollars more wisely. </p>
<p> Over the past two years, West Ohio Gas has implemented a new system, conceived and designed as an enterprise-wide information management solution used by virtually every business unit. Among the software applications being developed are DOT reporting and analysis, pressure control and analysis, customer complaint tracking, and emergency response. The emergency response application helps utility work crews trace through the natural gas network model to identify critical valves in the event of a leak. </p>
<p> Kentucky Utilities Co. As one of </p>
<p> its business strategies, Kentucky Utilities decided to use information technology to improve its trouble-outage management capability, contain the operational costs of growth by increasing labor efficiency, and provide more accurate and timely information to enhance customer service. </p>
<p> Senior management recognized that improved trouble-outage response was fundamental to maintaining superior customer service. The company envisioned a sophisticated system that includes call processing, outage analysis, outage status information, troubleman/ crew management, and a one-way supervisory control and data acquisition (SCADA) interface. The core AM/FM system will provide an information foundation for the trouble outage system, providing frequent updates. A work management system will be integrated with the AM/FM system to provide tools for more effective work design, estimating, project closing, and posting that ensure accurate and timely data for operations as jobs are completed. </p>
<p> Implementing and integrating these technologies will enable Kentucky Utilities to achieve its corporate objectives. The improved work management system will enhance labor productivity and help employees accomplish their jobs without staff additions. The AM/FM system will manage geographic data on line and provide a valuable facilities management tool. The trouble-outage entry/analysis system will support improved outage resolution and help the company provide more responsive customer service. </p>
<p> The business goals at BellSouth, West Ohio Gas, and Kentucky Utilities are the same as those at virtually any progressive utility in the 1990s: to be more competitive, to be more responsive to customers, to provide reliable service, and to respond effectively and efficiently to emergencies. The difference is that BellSouth, West Ohio Gas and Kentucky Utilities are adopting "appropriate" technology tools to help them achieve their goals, and "integrating" such tools into a mission-critical, decision-support system. </p>
<p> The trend toward increased regulatory scrutiny of issues related to safety, reliability, and customer service is entirely appropriate given the rapid change occurring in the utilities industry. The new regulatory standard should include examining how utilities use and integrate information technologies to meet these regulatory objectives and to escape the pitfalls of downsizing. t </p>
<p> Glenn E. Montgomery is co-chairman and CEO of Convergent Group, which provides spatial information system consulting services and software to electric, natural gas, and telecommunications providers worldwide. James P. Spiers, a former executive director of the Colorado Public Utilities Commission, works as a consultant/ </p>
<p> attorney in Boulder, CO.</p>
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Fri, 15 Mar 1996 05:00:00 +0000puradmin8379 at http://www.fortnightly.comBurnertip and Beyondhttp://www.fortnightly.com/fortnightly/1995/09-0/burnertip-and-beyond
<div class="field field-name-field-import-volume field-type-node-reference field-label-inline clearfix"><div class="field-label">Magazine Volume:&nbsp;</div><div class="field-items"><div class="field-item even">Fortnightly Magazine - September 15 1995</div></div></div><div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"><p>Erroll B. Davis, Jr.</p>
<p>President &amp; CEO</p>
<p>Wisconsin Power &amp; Light Co.</p>
<p>WP&amp;L advocates that the following steps be taken to create a level playing field for merchants entering the retail market:</p>
<p>s Distribution rates should be fully unbundled from retail sales tariff rates. WP&amp;L took this step years ago.</p>
<p>s Gas procurement, salaries, overhead, and gas storage working capital should be removed from distribution rates.</p>
<p>s Meter charges for transporters should be lowered to the true incremental cost to the LDC of providing transportation service versus "core" service, if any.</p>
<p>s LDCs should provide variable levels of firm backup to customers willing to pay for this service, anywhere from zero to 100 percent of full requirements.</p>
<p>Burnertip access will favor those entities most able to meet customer needs, regardless of where they currently operate in the gas business. LDCs that want to assume a retail merchant role, but are unwilling or unable to do so for risk and profit will be at a</p>
<p>severe disadvantage. Serious issues, such as whether utilities will be forced to provide gas as supplier of last resort, must be resolved for LDCs.</p>
<p>James A. Carrigg</p>
<p>Chairman, President, &amp; CEO</p>
<p>New York State Electric &amp; Gas Corp.</p>
<p>The retail gas distribution market is the most competitive aspect of the gas business. There is currently open access on most distribution systems. Several LDCs individually have more transportation customers than the entire pipeline industry. There is more customer choice beyond the city gate than anywhere else in the gas delivery chain. In addition to open access, gas LDCs compete against pipelines, local production, and alternative fuels.</p>
<p>Patrick J. Maher</p>
<p>Chairman &amp; CEO</p>
<p>Washington Gas Light Co.</p>
<p>Distribution markets have been opening up for 10 years. Most LDCs have been transporting gas for end users and putting together negotiated, tailor-made deals for many customers. The wellhead market is clearly competitive, but the secondary market for interstate pipeline capacity is not there yet. The FERC needs to address that issue and needs to rethink rate design too.</p>
<p>At the retail level, other marketers seek assignment of interstate pipeline capacity from LDCs in order to offer full city-gate service. To make this happen, we need to find rules that work fairly for all concerned and ensure reliable service for even the smallest customer. It will also be vital to find ways to achieve other social objectives traditionally provided through utility service.</p>
<p>Beverly A. Wharton</p>
<p>President, Gas Division</p>
<p>MidAmerican Energy Co.</p>
<p>For the most part, there is effective open access and competition for large- and medium-sized gas customers across the United States. These services largely</p>
<p>involve interruptible customers who have alternative energy- consuming capability, like fuel oil. Competition in residential and smaller commercial firm retail markets will occur when reliability, pricing, and the obligation to serve are replicated by several qualified, creditworthy gas suppliers.</p>
<p>Fair burnertip access will not necessarily favor pipelines, distributors, marketers, or brokers. It will favor suppliers that provide the best combination of price, reliability, flexibility, and service. The only significant risks are the obligation to serve (supplier of last resort), which is mandated to remain with the gas utility without appropriate compensation, and the threat of physical bypass of the utility. Otherwise, the various entities can be effective partners with the gas distribution utilities in growing the natural gas pie for everyone.</p>
<p>Bernard J. Kennedy</p>
<p>Chairman, President, &amp; CEO</p>
<p>National Fuel Gas Co.</p>
<p>Our industrial and commercial customers have had easy access to alternative gas supplies for several years now. In our Pennsylvania service area, residential customers have the ability to purchase gas supplies on the open market, although the demand has not yet materialized. In New York, the expansion of service unbundling to residential customers is being actively considered. Before long, we expect that any customer on our system will have the ability, if not the incentive, to buy gas from the supplier of his or her choice.</p>
<p>Ironically, the rate design policy mandated by the FERC in connection with pipeline unbundling under Order 636 hampers full retail unbundling. The sheer size of LDC demand-charge responsibility under straight-fixed-variable rates may frustrate initiatives to provide LDC customers with unlimited gas supply choices.</p>
<p>A total unbundling of gas utility services has the potential to benefit all segments of the industry, and more importantly, its customers, if it is taken on as a single, beginning-to-end, coordinated initiative. From our standpoint, the greatest risk is that utility service unbundling will proceed to a halfway point and then stall or stop completely. We are concerned about the further expansion of retail transportation if the utility is to remain the supplier of last resort. It would become increasingly expensive for us to provide a backup supply service for the benefit of a core market that can buy alternative supplies when they are available and attractively priced, and call on the utility when they are not. It will also perpetuate the current reluctance on the part of many utilities to make long-term commitments for gas supplies and upstream transportation and storage services.</p>
<p>The marketing companies stand to benefit most from a piecemeal approach to utility unbundling, because they will be able to capitalize on short-term opportunities without having to worry about long-term service obligations. If unbundling is undertaken comprehensively, and state regulatory agencies offer a balanced risk/ reward profile to the utilities, no single segment of the industry should be unfairly advantaged or disadvantaged. Thenceforth, the market will reward the companies that best meet the diverse needs of gas customers, and our customers will enjoy the benefits of this competition.</p>
<p>James Schretter</p>
<p>Senior Vice President</p>
<p>C.C. Pace Resources, Inc.</p>
<p>True burnertip competition will occur when multiple competitors of the same approximate size and market share, armed with the same information, compete for multiple customers with a minimum of regulations. This environment may take a lifetime to create. Currently, many gas LDCs have the upper hand, and true competition does not exist.</p>
<p>However, as the electric utilities "functionally unbundle" supply from distribution, the gas industry should look at separating inherently regulated from unregulated businesses. The physical distribution of gas is probably a regulated entity, with one operator of one pipeline system to your house or business. Similarly, the supply of gas and the sale of pipeline transportation capacity is probably an unregulated business. If a transition period can be established to protect existing LDC shareholders, customers will ultimately benefit from having suppliers compete fairly for their business.</p>
<p>The challenge to true burnertip competition is in the transition to a competitive marketplace. Information technology and the momentum of current marketer and brokers will influence this transition. The risk is in not trying and, as a result, weakening competition and harming customers fundamental position.</p>
<p>Gary G. Ely</p>
<p>Vice President, Natural Gas</p>
<p>Washington Water Power Co.</p>
<p>Customers in gas distribution markets have had alternative choices in other fuel energy options for a significant period of time. Burner access would not necessarily favor pipelines, distributors, or marketers. Price competitiveness and service, including reliability, will give the edge once burnertip access is available. The risks for each industry segment lie in their respective abilities to develop competitive alternatives and services to customers, and to do so in a timely manner.</p>
<p>R.E. Terry</p>
<p>Chairman &amp; CEO</p>
<p>The Peoples Gas Light and Coke Co.</p>
<p>State regulatory commissions need to ensure that distributors have the incentives to open up markets, and the tools needed to compete on the same footing as marketers, brokers, and pipelines.</p>
<p>A significant part of our market is already open to gas supply competition. Peoples Gas and North Shore have offered end-user transportation to all but their small</p>
<p>residential customers since the mid-1980s, with significant unbundled service options since 1991. In addition, Peoples Gas and North Shore have each proposed, in pending rate proceedings, completely unbundled rates for large commercial and industrial customers as well as additional transportation, storage, and balancing service options for end-users and pooling, storage, and balancing services for marketers that provide services to those end users. We are also replacing our existing electronic bulletin board with a state-of-the-art interactive system.</p>
<p>As for expanding these services to include small residential customers, Peoples Gas and North Shore are investigating how best to achieve burnertip sales competition for this class of customers. This effort demands a different approach than for larger customers and must resolve how to 1) avoid making transaction costs prohibitively high; 2) operate simply without unneeded and unwanted complexity; and 3) resolve supplier-of-last-resort, system</p>
<p>reliability, and social program and cost issues so that ratepayers, the utility, and third-party service providers are treated equitably.</p>
<p>If burnertip access is fairly implemented, and the difficult issues I have identified are resolved, any party able to provide competitive services should benefit. Clearly, consumers would benefit.</p>
<p>D. Louis Peoples</p>
<p>Vice Chairman &amp; CEO</p>
<p>Orange and Rockland Utilities, Inc.</p>
<p> .Pp</p>
<p>A fundamental requisite to fostering real competition is a truly level playing field. O&amp;R is reluctant to support a regulatory environment in which marketers and brokers can skim a portion of firm customers, for whom long-term costs were incurred, stranding remaining LDC customers with new transition costs. The obligation to serve, the recovery of capital outlays, and the burden of taxes on distribution facilities must be balanced among all suppliers to the retail market.</p>
<p>In July, the A.G.A. reported that the nation's overall natural gas demand is likely to grow 2.6 percent in 1995, with a 5.1-percent growth within the industrial market sector alone. If this projection holds, growth opportunities in the gas market will be open to distributors committed to competitive pricing and quality performance.</p>
<p>A level playing field (em offering open access and customer choice (em requires all distributors to assume risks and hold themselves accountable to the same standards of equity, environmental responsibility, service reliability, and other aspects of regulatory compliance.</p>
<p>Michael Baly</p>
<p>President &amp; CEO</p>
<p>American Gas Association</p>
<p>The extent to which unbundling has already taken place is often understated. About three-quarters of industrial gas demand and nearly one-quarter of commercial gas demand are already delivered by LDCs under transportation arrangements. Nearly all LDCs offer at least some of their customers unbundled services, and in a number of jurisdictions, general-service transportation tariffs are available to any customer willing to purchase the metering equipment required to operate under such service. Unbundling is continuing, and while few residential customers are currently eligible for transportation services today, they may well be eligible in the future if the issues of standby service, scheduling, balancing, and market aggregation rules can be fairly established.</p>
<p>Unbundling does not inherently favor any segment of the industry. It favors companies that can use technology to control costs and react quickly in the marketplace.</p>
<p>Dean T. Casaday</p>
<p>President &amp; CEO</p>
<p>Pennsylvania Gas and Water Co.</p>
<p>Mirroring the unbundling of the pipelines mandated by FERC Order 636 would open up retail gas-distribution markets to real competition, open access, and customer choice. However, making this work would generate new transition costs (em paid once again by the retail customers. These costs would include 1) installation of remote meter-reading devices at each retail customer location as well as a software system to collect data or the hiring of additional meter readers; 2) daily balancing and monthly cash out, setup costs, and administration; 3) abrogation of long-term supply and transportation contracts; and 4) any other costs incidental to the unbundling. An alternative would be to have a third party's personnel read the meters on a monthly basis and implement a mandatory standby charge systemwide to all customers in the form of a transition cost.</p>
<p>Burnertip access would favor marketers and brokers, since they are already shipping on the LDCs system and are unregulated. The main risk involved in open access is the utility's loss of control over the distribution system. Subordinate risks are the potential for runaway costs and loss of regulatory protection for the former residential core customers.</p>
<p>Jerald V. Halvorsen</p>
<p>President, Interstate Natural Gas Association of America</p>
<p>Individual states would have to take action to bring open access to the retail distribution market. If done correctly, open access will help pipelines, distributors, marketers, and customers, because there will be customer choice and good information that will lead to real competition, fair market pricing, and efficient services. However, all players must understand the service and contract obligations of an open-access delivery system. Further, the issue of cross-subsidization must be resolved to avoid unfairly penalizing any segment of the retail gas market.</p>
<p>Michael G. Morris</p>
<p>President &amp; CEO, Consumers Power Co.</p>
<p>It will take major regulatory changes to allow access as proposed in this question. Such regulatory change can only come from market-driven pressure; such demand on the part of the customer simply does not exist today. The reason is that natural gas companies all across the country continue to deliver lower and lower costs to their customers and, therefore, natural gas service consumes less of the customer's disposable income.</p>
<p>Allowing residential and small commercial customers the same choices may seem intriguing, but usually fails upon further analysis. Obligation to serve, notwithstanding cost-effectiveness, may limit the sellers, and uncollectible accounts will surely cause most sophisticated sellers to shy away from that market. Curtailment plans based on need rather than cost will also chill the market for many sellers. A gas marketer or broker that fails to perform for a small customer may find regulatory oversight a bit more than it bargained for.</p>
<p>John E. Hayes, Jr.</p>
<p>CEO, Western Resources</p>
<p>Many believe the next logical step in the deregulation of the natural gas industry is restructuring of local retail gas distribution companies. In this way, LDC customers, for the most part a captive market, would gain access to pricing opportunities that are available to interstate pipeline</p>
<p>customers. Depending upon individual interests, restructuring of LDCs clearly offers owners and operators distinct challenges and opportunities.</p>
<p>If our industry is to give customers the opportunity to reap advantages that an increasingly competitive marketplace can bring, we must be prepared to sign on to the reality of open access (em a total unbundling of services (em at the LDC level. In five to 10 years, open access at the LDC level could be a reality. As an industry, that is something we need to be planning now. A variety of concerns must be addressed: firm supply issues, long-term contracts, special handling requirements for transporters, service responsibilities, peak-period supply reliability and accountability, "obligation to serve," and shutoff rules. </p>
<p>Experience has shown that once open access arrives, customers will seek the most complete and reliable service available at the most reasonable price. To meet this challenge, LDCs should review current service offerings and determine from their customers what services should be expanded, modified, or added.</p>
<p>Value takes many forms for the customer, but we can be sure it includes basic components such as responsiveness to customers' needs, reliability and safety of service, and cost. Beyond basic components, LDCs can demonstrate added value through sensitivity to customers' needs and by helping them develop uniquely tailored solutions to meet those needs.</p>
<p>Open access does not mean we will see a proliferation of new local distribution systems. It does mean LDCs will have opportunities to price and package separate services they now bundle together at a set fee. Preparing now to identify, package, and price these options will determine how easily LDCs transition to the new marketplace and how well they can develop solutions that will improve their bottom-line revenues.</p>
<p>LDCs should also begin developing regulatory options that will support transition to this new marketplace. Flexible pricing and service options are two areas where we can work together to facilitate the transition. At the same time, "obligation to serve" and "no shut-off" issues must be addressed in a consistent, constructive, and beneficial way.</p>
<p>Charles E. Zeigler, Jr.</p>
<p>Chairman, President, &amp; CEO</p>
<p>Public Service Co. of North Carolina, Inc.</p>
<p>This question seems to infer that there is currently no competition in the retail energy markets served by natural gas LDCs. However, natural gas is in fierce competition against the electric heat pump, fuel oil, and other energy sources on a daily basis.</p>
<p>Changes in regulation or legislation will probably be required for widespread open access and customer choice to be achieved within the natural gas portion of the retail energy markets. Two factors will determine the winners of this contest: a) the final rules and regulations, and b) the ability to provide the required service at the lowest possible cost. This last point includes the best use of new technology in conjunction with the best work processes. The most significant associated risk is that cost could be driven up and the level of service reduced in order to provide customers a choice. Higher cost and lower service are not what our customers want, and would hinder the growth opportunities our industry should be able to create under FERC Order 636 and its market-based successors.</p>
<p>William E. Davis</p>
<p>Chairman and CEO</p>
<p>Niagara Mohawk Power Corp.</p>
<p>The first step toward real distribution company competition will be for each state to go through a restructuring/unbundling proceeding similar to the one currently underway in New York State. Each state commission must take a fair and objective look at the whole process.</p>
<p>The unbundling should be managed so that the customer will be given a choice as to supplier, but the LDCs will not be stuck with the stranded costs.</p>
<p>One of the inherent risks may be less reliable service, especially if the LDC is no longer obligated to serve. Each commission must consider who is going to plan for the future. Will competition and an open market provide for future facility expansion to meet new load (em as have regulated entities in the past? If the new market entrants are not willing to take those risks, growth in the industry may be stymied.</p>
<p>Corbin A. McNeill, Jr.</p>
<p>President &amp; CEO, PECO Energy Co.</p>
<p>The natural gas industry has seen many years of structural change, starting with the deregulation of wellhead prices in 1978. Now, large industrial consumers have direct access to gas supplies and can make transportation arrangements with pipelines and utilities. Utilities have direct access to gas supplies, with transportation by pipelines, and use that access to competitively source and</p>
<p>aggregate gas supplies for the core market.</p>
<p>Because it is unclear what real efficiency gains would follow from restructuring the natural gas utility industry, it is questionable whether the core market is better served by marketers than by utilities. Any theoretical efficiency gain involves major issues that stem from consumers buying from multiple suppliers out of a commingled gas stream. A supplier might be able to offer lower prices from greater efficiency, or from reduced reliability during periods of extreme demand. If emergency conditions developed due to unreliable suppliers or inadequate upstream capacity, it is unlikely that utilities and regulators would be absolved from responsibility.</p>
<p>Any potential efficiency gains must be weighed against the long-term reliability risks. These risks are substantial because competing suppliers to firm customers would have the incentive to be short on capacity and thereby raise margins.</p>
<p>Finally, without real efficiency gains, the residential customer is likely to see costs increase as marketers take higher load factor customers out of retail service. For all these reasons, PECO Energy is cautious about aggressive restructuring proposals. t</p>
<p><center>48</center>
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<a href="/tags/american-gas-association">American Gas Association</a><span class="pur_comma">, </span><a href="/tags/consumers-power">Consumers Power</a><span class="pur_comma">, </span><a href="/tags/curtailment">Curtailment</a><span class="pur_comma">, </span><a href="/tags/dc">DC</a><span class="pur_comma">, </span><a href="/tags/distribution">Distribution</a><span class="pur_comma">, </span><a href="/tags/ferc">FERC</a><span class="pur_comma">, </span><a href="/tags/information-technology">Information technology</a><span class="pur_comma">, </span><a href="/tags/interstate-natural-gas-association">Interstate Natural Gas Association</a><span class="pur_comma">, </span><a href="/tags/interstate-natural-gas-association-america">Interstate Natural Gas Association of America</a><span class="pur_comma">, </span><a href="/tags/midamerican">MidAmerican</a><span class="pur_comma">, </span><a href="/tags/midamerican-energy">MidAmerican Energy</a><span class="pur_comma">, </span><a href="/tags/national-fuel-gas">National Fuel Gas</a><span class="pur_comma">, </span><a href="/tags/new-york-state-electric-gas">New York State Electric &amp; Gas</a><span class="pur_comma">, </span><a href="/tags/niagara-mohawk-power">Niagara Mohawk Power</a><span class="pur_comma">, </span><a href="/tags/open-access">Open access</a><span class="pur_comma">, </span><a href="/tags/peco">PECO</a><span class="pur_comma">, </span><a href="/tags/peoples-gas">Peoples Gas</a><span class="pur_comma">, </span><a href="/tags/storage">storage</a> </div>
</div>
Fri, 15 Sep 1995 04:00:00 +0000puradmin9436 at http://www.fortnightly.comPower Marketers: Friend or Foe?http://www.fortnightly.com/fortnightly/1995/06/power-marketers-friend-or-foe
<div class="field field-name-field-import-byline field-type-text-long field-label-inline clearfix"><div class="field-label">Byline:&nbsp;</div><div class="field-items"><div class="field-item even"><p>PpErroll Davis, Jr.President &amp; CEOWPL Holdings, Inc. and Wisconsin Power and Light Co.</p>
</div></div></div><div class="field field-name-field-import-volume field-type-node-reference field-label-inline clearfix"><div class="field-label">Magazine Volume:&nbsp;</div><div class="field-items"><div class="field-item even">Fortnightly Magazine - June 1 1995</div></div></div><div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"></p>
<p> In our vision of the future, today's distribution function will be divided into two companies (em a poles and wire function and a merchant function. The merchant company would provide value-added products and services to the customer. We have used credit cards, branding, and other marketing gimmicks to sell our services, particularly demand-side management (DSM). In the future, however, I think there will be greater emphasis on the types of energy-purchasing alternatives we provide. Pricing options are one offering that we would expect to expand. The options could range from real-time pricing and green rates to negotiated fixed-fee prices. </p>
<p> Once merchants become competitive with one another for all customers, as we expect that they will, they will offer products and services well beyond our ability to imagine today. Information technology (IT) availability will increase, giving us more opportunity for two-way communications with customers. Obvious examples include real-time electronic billing information and remote energy management. As IT innovation occurs, we will seek ways in which to use that innovation to add value to the customer relationship. </p>
<p> Without betraying any competitive secrets, I would say that WP&amp;L is working hard to understand what our customers want most from us. High reliability and low prices are givens. Beyond that, we are looking at just about everything. What we eventually offer will, I hope, be whatever services provide us the greatest advantage with our customers. </p>
<p> The simple answer to all of the questions is "yes." Power marketers today pose a threat, or (em perhaps more appropriately (em are competition for our wholesale business. Less in response to any threat than in anticipation of future opportunity, WP&amp;L has developed an aggressive "in-house" power marketing group that buys and sells bulk power through our utility operations. </p>
<p> Today, WP&amp;L's generation costs are among the lowest in our reliability region, and we are taking steps to improve the efficiency of our generating units, reduce our fuel costs, and find other ways in which to lower our costs further. When transmission barriers are finally removed, we expect to be ready to buy and sell power in a broader arena and become even more aggressive within the bulk-power market. </p>
<p> We also have developed a power marketing capability in Heartland Energy Services, a company we spun off into the Heartland Development subsidiary of WPL Holdings. HES began by marketing natural gas, and last spring became the first FERC-approved utility-affiliated electric merchant in the country. Today, HES and WP&amp;L's power-marketing function are separate, competing entities. After utilities are vertically disintegrated, I would expect these two groups to become one company. </p>
<p></p>
<p><center>45</center>
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<div class="field-label">Tags:&nbsp;</div>
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<a href="/tags/dsm">DSM</a><span class="pur_comma">, </span><a href="/tags/ferc">FERC</a><span class="pur_comma">, </span><a href="/tags/information-technology">Information technology</a><span class="pur_comma">, </span><a href="/tags/it">IT</a> </div>
</div>
Thu, 01 Jun 1995 04:00:00 +0000puradmin9269 at http://www.fortnightly.comThe Future of the Local Gas Distributorhttp://www.fortnightly.com/fortnightly/1995/02/future-local-gas-distributor
<div class="field field-name-field-import-byline field-type-text-long field-label-inline clearfix"><div class="field-label">Byline:&nbsp;</div><div class="field-items"><div class="field-item even"><p>Vinod K. Dar</p>
</div></div></div><div class="field field-name-field-import-volume field-type-node-reference field-label-inline clearfix"><div class="field-label">Magazine Volume:&nbsp;</div><div class="field-items"><div class="field-item even">Fortnightly Magazine - February 1 1995</div></div></div><div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"><p>In less than a decade, three powerful trends will converge on gas distributors. These trends promise to transform local distribution companies (LDCs) beyond recognition, whether municipal or investor-owned.</p>
<p>Few LDC executives and Board members today care to acknowledge these trends. Many find it more comforting to ignore, deny, or misconstrue their impact. But LDCs, having led a sheltered life, now confront a truly defining moment. These trends represent threats to survival. Right or wrong choices can lead to assertive prosperity or befuddled extinction.Threat #1 - Electric Competition</p>
<p>The electric utility industry ($200 billion a year in sales) is restructuring from a lumbering, high-cost business into a competitive provider of electricity and regulated services. This transformation will create powerful unregulated merchants intent on unearthing every conceivable business opportunity among energy consumers. Transmission and distribution firms will maximize deliveries; commodity power generators operating at high capacity will pump electricity under an array of pricing arrangements tailored to capture market share.</p>
<p>Technological and service innovation will explode. Next-generation metering, billing, and customer service systems will accompany efficient electro-technologies-not just for large industrial customers, but also residential and commercial users as well. This potent combination of customer service and product innovation-anchored by steadily falling prices at the meter-will turn electricity into the energy form of choice. Gas distributors will face threats aimed both at industrial users and their core base of institutional, commercial, and residential consumers.</p>
<p>When the gas executives think of electricity, they tend to focus on independent power generation is an unalloyed opportunity. They overlook the transformation of the electricity industry-potentially an even bigger business hazard.Threat #2 - LDC Deregulation</p>
<p>The third wave of natural gas deregulation is now sweeping over LDCs from California to New Jersey. The first wave deregulated gas at the wellhead and in bulk sales. The second wave targeted pipelines: Ending their merchant role, unbundling their services, and creating property rights in transportation and storage capacity. The consolidation is by no means complete.</p>
<p>Natural gas distribution remains highly fragmented. Almost 2,000 distinct entities populate the business; about half are investor-owned and heavily regulated by state utility commissions (PUCs). The largest LDC accounts for less than 5.5 percent of deliveries to final consumers; the ten largest account for less than 20 percent. The vast majority of LDCs (investor-owned and municipal) deliver less gas than most unregulated gas marketers.</p>
<p>This third wave (deregulation of distribution) will wither away any regulated sales to the middle market (e.g., schools, hospitals, hotels, apartment complexes). The first two waves brought competition to over 80 percent of the components of delivered price paid by bulk users, but only 40 to 50 percent of the delivered middle market price (and, on average, less than 40 percent of the residential burnertip price). The third wave will attack the rest of the delivered price by supplying unregulated merchants with unprecedented access to the middle market meter (to be followed by the residential meter). Incipient unregulated retail merchants will campaign hard to unbundle LDC tariffs. The merchant will operate free from traditional administrative functions, exposing high cost structures of LDCs. These high costs will include: gas acquisition costs, demand charges for firm pipeline transportation and storage capacity, expensive on-system storage capacity, high internal overhead, obsolete but undepreciated portions of the physical plant, and excessive administrative, metering,and billing costs.</p>
<p>Consumer advocates and regulators won't stand still. Rate cases will become increasingly contentious, and reductions in internal overhead will lead to write offs. Dividends and stock prices will quite likely suffer as financial markets grow skeptical about the long-term attractiveness of many investor-owned LDCs. Bond ratings may fall for some LDCs.Threat #3 - Information Technology</p>
<p>Information technology marks the great equalizer. It not only diffuses knowledge; it compresses the response time of consumers and competitors. Institutional strengths become weaknesses. For example, LDC billing and collection systems used to stand as a formidable barrier to entry for unregulated merchants seeking to serve the middle market for gas and eventually the residential sector. No more. LDC billing systems now offer bypass opportunities to incipient unregulated retail merchants.</p>
<p>About half a dozen unregulated proto-retailers already exist. More are likely to emerge. These rising new merchants plan to aggregate hundreds of thousands of middle market meters and then millions of residential meters once the middle market falls. To accomplish this goal, they are developing sophisticated next-generation billing, collection, and customer service systems. These systems will boast features no LDC system can duplicate just by tinkering around the edges, such as:highly customized invoicing;</p>
<p>tailored pricing and payment terms;</p>
<p>component billing from wellhead to burnertip; and</p>
<p>automatic disbursement for gas supply, transportation, and storage services.These customized information services transform the gas bill from an accounting document into a business tool for customers or competing merchants. They increase the productivity of financial capital; they convert physical assets into mere commodities.</p>
<p> Response #1 - Merge</p>
<p>Wall Street will invariably counsel its LDC clients to merge, acquire or be acquired. This advice is understandable, since it generates fees for investment bankers and securities lawyers. Acquisitions cater well to the professional pride of executives, but don't always solve problems. A merger of two flawed strategies or two uncompetitive companies or two obsolete corporate cultures may prove worse than keeping the firms apart.</p>
<p>Nevertheless, some corporate combinations do make sense for LDCs. A merger may allow an LDC to strike a bargain with State regulators to recover the acquisition premium over book value-a common desire in utility merger cases. Recovery might be achieved through credits generated by incentive rate making or trimming the cost of capital through a reconfigured balance sheet. Or, the LDC might join with regulators to cut risk by shedding the merchant function or perhaps even firm transportation and storage capacity on interstate pipelines.Response #2 - Reposition Inside</p>
<p>Precious little value remains in gas commodity sales or bare transportation; the value has migrated to knowledge end-i.e., how to make commodities useful to consumers. The gas molecule itself is not the product; the product arises instead from the portfolio of services that can be stapled to that gas molecule.</p>
<p>Energy consumers do not want energy per se, but the benefits that using energy bring. These benefits (and their perceived value) differ not merely by type or category or consumer, but by individual user. In the years ahead, the greatest asset available to an energy services company will come from a current and comprehensive knowledge about each consumer. But very rarely will an LDC conduct an "exit" poll to fathom why a customer has fled its sales tariffs or high-cost storage rates. LDCs often grow sullen at the loss of a middle market user who sends business to an unregulated merchant. When coupled with the loss of the burnertip, this negative attitude virtually guarantees that the LDC will never grasp the changing needs of middle market buyers.</p>
<p>Each LDC will hold a unique set of core abilities and corporate weakness that will define the pace of change. Further, each LDC must choose from many different options for internal repositioning:(i) Phase out the regulatory bargain. As consumers go elsewhere, phase out all regulated sales by a date certain (including sales to residentials) and file unbundled non-sales tariffs in return for the freedom to offer non-commodity tariff services.</p>
<p>(ii) Write off losers. Abandon or sell portions of the distribution system and physical plant; use the proceeds to finance and include in rate base the cost of the most advanced information technology needed to offer non-commodity tariff-based services.</p>
<p>(iii) Milk the winners. Gain the right to spin off innovative or proprietary services developed within the rate base to non-regulated subsidiaries operating outside the service area, provided rate payers are compensated appropriately.</p>
<p>(iv) Customize tariffs. Offer a portfolio of knowledge- or system-based tariffs, such as physical flow interruption insurance, least-cost route scanning, or system balancing for private retail merchants, large-user shippers, or small-user buying cooperatives.</p>
<p>(v) Straddle the city gate. Offer services such as capacity acquisition for consumers behind the city gate (i.e., a gas travel agency service); storage capacity leasing outside the city gate, physical storage inside the city gate, or contract storage via gas banking programs.</p>
<p>(vi) Offer virtual pricing. Offer hedging for those who can't do it themselves. At regular intervals the LDC would receive from or pay to consumers the difference between (a) a prearranged price and (b) the sum of (1) the cash market city gate price as quoted by wholesalers, (2) a previously agreed upon retailing mark up, and (3) LDC transportation charges relevant to that consumer.</p>
<p>(vii) Upgrade billing. Develop next-generation systems: metering, acquisition of delivery data, billing and collection, and automated customer service and volume reconciliation. Take a look at natural gas credit cards for small business and residential users.</p>
<p>(viii) A lender be. Build rate base with a consumer financing service. Three options arise: (a) short-term collateral lending to smooth out cash flow; (b) seasonal financing of gas in storage or for large shippers; (c) long-term leasing and financing of gas-fueled projects for environmental compliance.At one extreme, the LDC can be satisfied as just a competent and courteous trucker for large users and shippers providing stripped down transportation from city gate to meter. At the other, the LDC can be a non-commodity merchant of a full-service package of transportation, insurance, financing, technology and knowledge. Repositioning can make the LDC the energy company with a thousand faces and a million profit opportunities. The obligation to serve will evolve into the obligation and the desire to be of service. There will then be no captive consumers, only satisfied customers. The rate base will become a very attractive portfolio of physical, financial and intellectual assets. The return on this rate base will combine a utility annuity with enterprise rewards.Response #3 - Diversify Outside</p>
<p>As with all strategies, diversification outside the rate base and the regulated service territory works best if done selectively but leads to woe if performed carelessly. The best opportunities for most LDCs reside in niches lying in and around the energy industry, because LDC executives can either readily learn about these businesses or grasp them intuitively. LDCs have not done well in areas unrelated to energy, such as real estate, or in capital-intensive commodity plays such as coal mining, timber, oil and gas exploration, or hard rock mining. They have written off hundreds of millions in such forays-unable to add executive or entrepreneurial value to upstream energy production or non-energy commodity businesses. This problem will carry over to independent power production during the 1990s, when the numbers will change and dozens of independent power projects could wind up stranded like so many shut-in gas wells.</p>
<p>The most successful diversification opportunities will fall within the range of $5 to $25 million of equity per transaction. This range affords incremental investment, permits the creation of a portfolio of related opportunities and avoids the historical error of exposing capital to one or two large business bets. The investment vehicles will vary widely: internal startups and spin offs, second-stage investments in young niche companies, taking over a small- to medium-sized private company whose growth is limited by inadequate capital or management, or acquiring a friendly controlling interest in a "small-cap" public company (capitalization less the $50 million) that operates in an appropriate business segment.Response #4 - Build a Fortress</p>
<p>Many LDCs will find it tempting to rely on rate design to thwart competition and frustrate customer choice. While conceding the public policy issues of open access and comparability of service, LDCs understand the devil in the details. Property structured, tariffs can deny real choice to consumers in the residential and middle market segments and genuine access to non-regulated competitors.</p>
<p>As a strategic option, fortress rate design was tried unsuccessfully by certain interstate natural gas pipelines during the late 1980s and early 1990s, but that failure might not deter some LDC executives. Rate design tinkering can fight off competition when the state PUC is understaffed or distracted by other issues (e.g., telecommunications and electricity restructuring). Or when residential, institutional, and small commercial customers account for over 50 percent of system deliveries. When the LDC serves few large industrials (and those it does have already negotiated special treatment on transportation and storage). When middle market consumers lack an organized voice (almost always true). When unregulated wholesalers and retailers haven't yet arrived. Or when the home state is small, with only one or two politically powerful LDCs dominating the distribution business.</p>
<p>Some common fortress rate design techniques include high monthly fixed meter charges for transportation customers, prohibitive imbalance penalties, onerous credit requirements for shippers, denying load pooling to middle market consumers (blocking system balancing for the emerging non-regulated retail merchants), overallocating interstate charges to LDC transportation rates, making it difficult to obtain necessary metering and dispatching data and back-up service; setting exorbitant winter storage service rates, and giving preferential treatment to transportation customers who acquire brokered interstate transportation capacity from the LDC.</p>
<p>Fortress rate design can and will succeed as an expedient but temporary solution. Some LDCs may lean on this strategy to prolong the transition to retail deregulation and competition. But it won't prepare LDCs for the day when unregulated merchants and outraged captive consumers smash the rate base and storm the Bastille.A Time To Change</p>
<p>The rate base today is something to build on, not live on. The LDC rate base, as we have known it, is melting away. It cannot be frozen in place. Those LDCs who recognize this fundamental truth will become something new: A hybrid energy services company with a regulated logistical franchise and an unregulated brand name. Those LDCs that fail to evolve will disappear-their managers scattered and their very name forgotten. For some, a mere two to three years remain before it is too late. None enjoys so much as a decade's grace.</p>
<p>Vinod K. Dar is Chairman of both Jefferson Gas Systems, Inc., a private investment company, and its electric subsidiary, Jefferson Electric Inc. He also serves as Senior Advisor to RCG/Hagler, Bailly, Inc., an international energy and environmental consulting firm. As industry executive and private consultant, Vinod Dar he has written over 100 articles and given over 70 speeches on the strategic and management issues facing North American energy companies.</p>
<p>(Callouts:)</p>
<p>The vast majority of LDCs deliver less gas than most unregulated marketers.LDCs have not done well in capital-intensive commodity plays such as coal mining, timber, oil and gas exploration, or hard rock mining.(Sidebar:)</p>
<p>LDC Core Assets</p>
<p>Access to consumers</p>
<p>Name recognition</p>
<p>Regulatory knowledge</p>
<p>System operating knowledge</p>
<p>Monopoly over physical gas movement (to all but largest customers)</p>
<p>Rights of way</p>
<p>Large cash balance (sometimes)</p>
<p>(Sidebar:)</p>
<p>LDC Core Weaknesses</p>
<p>Stale corporate culture</p>
<p>Decisionmaking by committee</p>
<p>High-cost operations</p>
<p>Excessive overhead</p>
<p>Ignorance of customer needs</p>
<p>Underestimating competitors</p>
<p>Mistaking rate design for pricing</p>
<p>Obsolete billing software</p>
<p>Fragmented physical systems (sometimes)(Sidebar:)</p>
<p>Winners for the 90s</p>
<p> Unregulated gas and electricity marketing</p>
<p>Energy-related software</p>
<p>Measuring and metering technologies</p>
<p>Billing and collection systems</p>
<p>Gas gathering, treatment and processing</p>
<p>Second-generation market area supply hubs</p>
<p>Needle peaking market area storage projects</p>
<p>Gas-fired peaking generation (markets with transmission bottlenecks)</p>
<p>Fuel procurement (as an outsource vendor)</p>
<p>Gas vehicle fueling stations</p>
<p>Vehicle fleet conversion</p>
<p>Appliance servicing</p>
<p></p>
<p><center>20</center>
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<div class="field-label">Tags:&nbsp;</div>
<div class="field-items">
<a href="/tags/billing">Billing</a><span class="pur_comma">, </span><a href="/tags/cash-flow">cash flow</a><span class="pur_comma">, </span><a href="/tags/dc">DC</a><span class="pur_comma">, </span><a href="/tags/deregulation">Deregulation</a><span class="pur_comma">, </span><a href="/tags/information-technology">Information technology</a><span class="pur_comma">, </span><a href="/tags/natural-gas">Natural gas</a><span class="pur_comma">, </span><a href="/tags/new-jersey">New Jersey</a><span class="pur_comma">, </span><a href="/tags/recovery">Recovery</a><span class="pur_comma">, </span><a href="/tags/storage">storage</a><span class="pur_comma">, </span><a href="/tags/technology">Technology</a><span class="pur_comma">, </span><a href="/tags/transmission">Transmission</a><span class="pur_comma">, </span><a href="/tags/transmission-and-distribution">Transmission and distribution</a> </div>
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Wed, 01 Feb 1995 05:00:00 +0000puradmin9015 at http://www.fortnightly.com